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Intera^ney 

Task  Force 
on 

Product 

Liability 

Final  Report 

U.S.  DEPARTMENT  OF  COMMERCE 


o 


X 


'  / 


Digitized  by  the  Internet  Archive 

in  2012  with  funding  from 

LYRASIS  IVIembers  and  Sloan  Foundation 


http://archive.org/details/interagencytaskfOOunit 


THE  UNDER  SECRETARY  OF  COMMERCE 

Washington,  DC.    20230 


PREFACE 


This  report  represents  the  culmination  of  over  one  year  of  effort 
by  a  Federal  Interagency  Task  Force  in  the  study  of  the  topic  of 
product  liability.   This  endeavor  has  involved  Federal  agencies, 
independent  contractors,  private  organizations,  as  well  as  con- 
sumers, manufacturers,  distributors,  retailers  and  insurers. 
While  the  report  does  not  purport  to  answer  all  questions  that 
have  arisen  in  the  field,  it  provides  the  most  thorough  analysis 
of  problems  in  the  product  liability  area  that  has  been  published 
in  the  United  States. 


It  is  important  to  emphasize  the  independent  nature  of  this  report. 
The  Chairman  of  the  Working  Task  Force  group  and  his  staff  were 
not  subject  to  any  pressures  "to  find"  in  favor  of  one  interest 
group  or  another  —  his  basic  policy  guideline  was  to  be  objective, 
disclose  the  facts  (or  lack  thereof) ,  and  consider  the  competing 
concerns  of  all  groups  affected  by  the  product  liability  problem. 

As  Chairman  of  the  Task  Force,  I  wish  to  acknowledge  the  dedicated 
staff  work  at  the  Department  of  Commerce  and  the  steadfast  assis- 
tance given  to  my  Department  by  the  other  member  agencies.   The 
agencies  willingly  gave  the  time  of  their  talented  personnel  to 
this  project.   They  assisted  in  the  planning  and  development  stage 
and  reviewed  and  commented  about  drafts  of  each  chapter.   While 
not  every  comment  of  every  agency  has  been  incorporated,  the  result 
of  the  Interagency  review  process  was  to  enhance  the  balance  and 
objectivity  of  the  report. 

While  this  report  does  not  represent  the  views  of  the  Administration, 
it  is  submitted  for  its  use  as  well  as  the  use  of  Federal  and  state 
legislators,  consumer,  insurer  and  business  groups  and  others  who 
are  interested  in  product  liability  problems. 

As  anyone  familiar  with  the  problem  knows,  many  solutions  have  been 
voiced  by  groups  that  have  a  strong  self-interest  in  the  topic.   It 
is  hoped  that  this  report  will  allow  all  concerned  to  appreciate 
both  the  strengths  and  weaknesses  of  their  respective  positions  and 
that  it  will  lead  to  constructive  solutions. 


This  report  represents  the  work  of  a  large  number  of  people 
both  in  government  and  in  private  organizations.   Some 
government  personnel  have  devoted  their  full  time  to  this 
project;  others  have  very  willingly  given  of  their  time 
whenever  they  were  asked  to  do  so.   A  comprehensive  and 
objective  study  of  this  complex  subject  could  not  have 
been  completed  without  the  cooperation  and  support  of  all 
of  these  individuals:   they  brought  both  varied  disciplines 
and  diverse  points  of  view  to  the  project. 

This  Final  Report  of  the  Task  Force  represents  the  synthesis 
of  these  efforts  and  a  balancing  of  the  many  interests  that 
are  affected  by  product  liability  problems. 

The  sources  used  by  the  Task  Force  are  described  in  Chapter  I 
of  this  report.   As  a  law  professor  for  the  past  ten  years, 
I  have  seen  most  research  efforts  conducted  on  an  individual 
basis.   On  this  project,  I  have  witnessed  the  invaluable 
dividends  that  can  result  when  a  large  group  of  talented 
people  work  together  toward  a  common  research  goal.   I  would 
like  to  acknowledge,  with  deepest  appreciation,  the  many 
individuals  whose  time  and  talents  have  created  this  report. 

r 


Vicror  E.  Schwartz 
Chairman,  Working  Task  Force 
Federal  Interagency  Task  Force 
on  Product  Liability 


THE   TASK   FORCE 


Overall   policy   guidance 
provided  by: 


at   the  Department  of  Commerce  was 


Chairman  of  the  Task  Force 
General  Counsel 
Deputy  General  Counsel 
Assistant  Secretary 
for  Domestic  and 
International  Business 
Former  Under  Secretary 
Former  General  Counsel 


Under  Secretary,  Sidney  Harman 

C.  L.  Haslam 

Homer  E.  Moyer ,  Jr . 


Frank  A.  Weil 
Edward  0.  Vetter 
J.  T.  Smith,  II 


The  other  agencies  participating  as  Task  Force  members  were: 


Council  of  Economic  Advisers 

Department  of  Health,  Education  &  Welfare 

Department  of  Housing  &  Urban  Development 

Department  of  Justice 

Department  of  Labor 

Department  of  Transportation 

Department  of  Treasury 

Office  of  Management  &  Budget 

Small  Business  Administration 

Advice  and  assistance  provided  by: 
Consumer  Product  Safety  Commission 


THE  GOVERNMENT  STAFF 


The  Working  Task  Force: 


•  Victor  E.  Schwartz,  Professor  of  Law 

•  Council  of  Economic  Advisors 

•  Department  of  Commerce 

•  Department  of  Health, 
Education  and  Welfare 

•  Department  of  Housing 
and  Urban  Development 

•  Department  of  Justice 

•  Department  of  Labor 

•  Department  of  Transportation 

•  Department  of  Treasury 

•  Office  of  Management 
and  Budget 

•  Small  Business  Administration 

•  Consumer  Product  Safety 
Commission 


Chairman 
Susan  Lepper 
David  McNichol 
Samuel  B.  Sherwin 
Kenneth  Gordon 

Peter  Konijn 
Howard  B.  Clark 
James  Brodsky 
Ronald  Gainer 
Neil  Peterson 
Robert  Copeland 
Edward  Bergin 
Richard  Walsh 
Wolf  Haber 
Dr .  James  Van  Home 
Richard  Sheppard 
Edward  Clarke 
Maureen  Glebes 
Edward  Heiden 
Paul  Gatons 


11 


Chapter  Editors 


Victor  E.  Schwartz 
John  Flannagan 
Jane  Molloy 
Virgil  Ketterling 
Donald  Smiegiel 


Senior  Editor 
Data  Editor 


Technical  Advisors 


Howard  B.  Clark 
Donald  Jordan 
Richard  Johnson 
Eli  Bernzweig 
Charles  Ashley 


Senior  Technical  Advisor 


Project  Director 


Edward  T.  Barrett,  II 


Executive  Secretary 


Charles  E.  van  der  Burgh 


Support  and  Secretarial  Staff 


Richard  E.  Smith,  Jr 
Carol  Kindig 
Patricia  S.  Pearson 
Gladys  Aiken 
Antrena  Bankhead 
Zula  Dietrich 
Chris  Sopko 
Gloria  Brown 
Gladys  Joseph 


Administrative  Officer 

Editorial  Assistant 

Secretary  to  the  Project  Director 


Administrative  Support 


Legal  Advisors 


Alfred  E.  Meisner 

Jan  Foley 

Daniel  C.  Hurley,  Jr. 


Assistant  General  Counsel,  DOC 


111 


Citation  Editors 

Geoffrey  L.  Master 
Josephine  Powe 
Pamela  Rollins 

Senior  Advisor 


Louis  C.  Santone 


Director,  Office  of  Business  and 
Legislative  Issues 


Mr.  Santone  and  David  M.  Glancy,  Deputy  Director,  Office  of 
Business  and  Legislative  Issues,  contributed  to  the  original 
design  and  organization  of  the  Interagency  Task  Force.  Their 
office  contributed  analytic  and  administrative  support  during  the 
conduct  of  this  study. 


IV 


THE  PRIVATE  SECTOR 

The  Advisory  Committee  on  Product  Liabil ity 

The  contributions  of  the  Advisory  Committee  to  the  Under 
Secretary  of  Commerce  are  discussed  in  Chapter  I  and  in 
statements  by  several  members  who  are  cited  throughout  the  Final 
Report .  As  is  noted  in  Chapter  I,  this  report  does  not 
necessarily  represent  the  views  of  individual  members;  nor  should 
it  be  considered  to  represent  a  consensus  of  the  Committee. 
Comments  of  the  members  regarding  the  report  will  be  published 
separately. 

The  Advisory  Committee  Members  are  listed  as  follows. 


The  Honorable  Ned  Price,  Senior  Member,  Texas  State  Board  of 
Insurance,  Austin  Texas,  has  been  serving  as  Chairman  of  the 
Advisory  Committee. 


ADVISORY  COMMITTEE  ON  PRODUCT  LIABILITY 

Ralph  B.  Baldwin,  President,  Oliver  Machinery  Company 

Melvin  Block,  Esquire,  Attorney  at  Law 

Judy  Braiman-Lipson ,  President,  Empire  State  Consumer  Assoc., 

Inc  . 
William  M.  Brooks,  Senior  Partner,  Brooks  Burke  Surgical  Supply 

Co. 
Jacob  Clayman,  Secretary-Treasurer,  Industrial  Union  Department, 

AFL-CIO 
Robert  Clements,  Senior  Vice  President,  Marsh  &  McLennan,  Inc. 
John  Russell  Deane  III,  Esquire,  Attorney  at  Law 
Vincent  Graham,  Vice  President,  Merchandise  Admin.,  Sears, 

Roebuck  &  Co . 
Lloyd  Hackler,  President,  American  Retail  Federation 
Dr.  Clare  G.  Johnson,  Physician 
Frederick  Juer  ,  President,  Worth  Bat  Company 
Eugene  M.  Kennedy,  President,  Whitin  Machine  Works 
John  Koch,  Esquire,  Covington  &  Burling 
James  H.  Mack,  Public  Affairs  Director,  National  Machine 

Tool  Builders  Association 
Joseph  McEwen,  President,  Modern  Handling  Equipment  Company 
Daniel  J.  McNamara,  President,  Insurance  Services  Office 
Edward  J.  Noha ,  Chairman  of  the  Boards  &  Chief  Exec.  Off.,  CNA 

Insurance 
Paul  Rheingold,  Esquire,  Attorney  at  Law 

Fred  G.  Secrest,  Executive  Vice  President,  Ford  Motor  Company 
John  J.  Sheehan,  Legislative  Director,  United  Steelworkers  of 

America 
Charles  W.  Stewart,  Jr.,  President,  Machinery  and  Allied  Products 

Institute 
William  H.  Wallace,  Esquire,  Thompson,  Hine  and  Flory 
Edward  B.  Wilson  II,  Chairman  of  the  Board,  J.  Walter  Thompson 

Company 
Richard  D.  Wood,  Chairman  of  the  Board,  Eli  Lilly  &  Company 
W.  Thomas  York,  President,  AMF  Inc. 


VI 


THE  SYMPOSIUM  ON  PRODUCT  LIABILITY  -  July,  1976 

The  symposium  is  described  in  Chapter  VII,  and  an  edited 
version  of  the  transcript  of  the  proceedings  will  appear  in  the 
Selected  Working  Papers.  The  contribution  of  the  participants  is 
acknowledged  with  deep  appreciation.  A  listing  of  the 
participants  follows: 

John  W.  Wade 

Distinguished  Professor  of  Law 

Vanderbilt  University  School  of  Law 

Dr  .  Nina  Cornell 

Senior  Staff  Member 

Council  of  Economic  Advisors 

Executive  Office  of  the  President 

Honorable  Richard  M.  Markus 

(Currently)  Judge,  Cuyahoga  County 

Court  of  Common  Pleas 

(July,  1976)  Spangenberg,  Shibley,  Traci,  Lancione  &  Markus 

Professor  Jeffrey  O'Connell 
University  of  Illinois 
School  of  Law 

Professor  Walter  Oi 

Chairman,  Department  of  Economics 

University  of  Rochester 

Professor  Douglas  Olson 
Associate  Professor  of  Insurance 
Wharton  School  of  Business 
University  of  Pennsylvania 

Professor  Jerry  Phillips 
University  of  Tennessee 
College  of  Law 

William  H.  Wallace,  Esquire 

Chairman  of  the  Board 

The  Defense  Research  Institute 


Vll 


Professor  Alvin  S.  Weinstein 
Department  of  Mechanical  Engineerinj 
Carnegie  Mellon  University 


Vll  1 


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I- 

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I- 

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I- 

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I- 

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I- 

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I- 

-8 

TABLE  OF  CONTENTS 

CHAPTER  I-THE  NATURE  OF  THIS  REPORT  AND  THE  CAUSES 
OF  THE  PRODUCT  LIABILITY  PROBLEM 

Page 

INTRODUCTION 

THE  BASIS  FOR  A  FEDERAL  STUDY  ON  PRODUCT  LIABILITY 

THE  FEDERAL  INTERAGENCY  TASK  FORCE  ON  PRODUCT  LIABILITY... 

THE  TASK  FORCE 

THE  WORKING  TASK  FORCE 

THE  STAFF 

THE  TASK  FORCE'S  GENERAL  GUIDELINES  OF  THE  SCOPE  OF 

THE  STUDY 

GENERAL  SOURCES  OF  INFORMATION 

INTERAGENCY  COMMENTARY 

PRODUCT  LIABILITY  SYMPOSIUM 

NOTICE  IN  THE  FEDERAL  REGISTER 

PRODUCT  LIABILITY  ADVISORY  COMMITTEE  TO  THE  UNDER 

SECRETARY  OF  COMMERCE 1-8 

INFORMATION  FROM  INDUSTRY  ASSOCIATIONS  AND  INTEREST 

GROUPS , 1-9 

INFORMATION  REGARDING  CONSUMER  PERSPECTIVES  ON  THE 

PRODUCT  LIABILITY  PROBLEM 1-10 

HEARINGS  UNDERTAKEN  BY  CONGRESS 1-11 

THE  TASK  FORCE'S  INDEPENDENT  CONTRACTOR  REPORTS 1-11 

THE  LEGAL  STUDY 1-12 

INSURANCE  STUDY 1-14 

INDUSTRY  STUDY 1-15 

AN  OVERVIEW  OF  THE  CONTENTS  OF  THIS  REPORT 1-18 

THE  CAUSES  OF  THE  PRODUCT  LIABILITY  PROBLEM 1-20 

INTRODUCTION 1-20 

DISCUSSION  OF  THE  CAUSES 1-21 

Cause  I:   Liability  Insurance  Ratemaking  Procedures..    1-21 

Cause  II:   Manufacturing  Practices 1-24 

Cause  III:   The  Tort-Litigation  System 1-26 

Other  Causes 1-29 

Inflation 1-29 

Consumer  and  Worker  Awareness 1-29 

Increases  in  the  Number  and  Complexity  of 
Products 1-30 


IX 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Product  Misuse 1-30 

NOTES  TO  CHAPTER  1 1-32 

CHAPTER  II-PRODUCT  LIABILITY-A  LEGAL  FRAMEWORK 

INTRODUCTION II-  1 

AN  OVERVIEW  OF  PRODUCT  LIABILITY  LAW II-  3 

INTRODUCTION II-  3 

SOME  MAJOR  ISSUES  IN  PRODUCT  LIABILITY  LAW II-  6 

A  Manufacturer's  Duty  to  Design  Its  Product 

Properly II-  6 

Introduction II-  6 

Defectiveness  and  Strict  Liability II-  6 

Strict  Liability  in  Design  Cases II-  8 

The  User's  Conception  of  the  Product 11-10 

The  Manufacturer's  Ability  to  Make  the  Product 

Safer II-1  1 

Conclusion 11-12 

The  Manufacturer's  Duty  to  Warn  Users  or  Consumers 

About  Hazards  Connected  With  Its  Product 11-12 

Introduction 11-12 

Theories  of  Recovery 11-13 

Factual  Considerations 11-15 

Conclusion 11-18 

How  Does  the  Conduct  of  the  Product  User  or  Consumer 

Affect  His  Claim? 11-19 

Introduction 11-19 

Assumption  of  Risk 11-20 

Misuse 11-2  3 

Contributory    Negligence 11-25 

Comparative    Fault 11-26 

A    Product    Liability    Defendant's    Right    to    Shift    the 

Cost    of   Accidents    Onto    Others 11-2? 

Introduction 11-27 

Suits    Against    Ultimate    Purchasers 11-29 

Suits    Against    Intermediaries 11-30 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Suits  Against  Co-Manufacturers 11-31 

The  New  Doctrines  of  Comparative  Fault 11-32 

Product  Liability  Law  in  the  Workplace-Have  Courts 
Developed  or  Have  Statutes  Required  Different  Legal 
Treatment  for  Work-Related  and  Non-Work-Related 

Injuries 11-35 

Introduction 11-35 

Status  as  an  Employee 11-36 

Concept  of  Involuntary  Use  of  Product 11-39 

The  Presence  of  the  Employer 11-41 

Conclusion 11-43 

A  REVIEW  OF  PRODUCT  LIABILITY  DATA-AVAILABLE  FROM  THE 

LEGAL  SYSTEM 11-43 

A  SURVEY  OF  SECONDARY  SOURCES 11-43 

Introduction 11-43 

Sources  of  Data  and  Analysis 11-44 

Annual  Report  of  the  Director  of  the 
Administrative  Office  of  the  United  States 

Courts 11-44 

Judicial  Department  of  Connecticut 11-45 

RELATED  SURVEYS  CONDUCTED  BY  OTHER  ORGANIZATIONS 11-46 

Survey  of  Product  Liability  Cases  in  the  Greater 
Kansas  City  Area  Conducted  by  the  Kansas  Trial 

Lawyers  Association 11-46 

Illinois  Jury  Verdict  Report-Cook  County  Survey, 

1970-1975 11-46 

AN  INDEPENDENT  SURVEY  OF  PRODUCT  LIABILITY  APPELLATE 

CASES  IN  SELECTED  STATES 11-47 

Identification  of  Sample  States 11-47 

What  the  Survey  Showed 11-49 

Findings  -  The  Sample  States  as  a  Group 11-51 

Findings  -  The  Individual  Sample  States 11-56 

NOTES  TO  CHAPTER  II 11-58 


XI 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

CHAPTER  III-THE  IMPACT  OF  PRODUCT  LIABILITY 
ON  SELECTED  INDUSTRIES 

INTRODUCTION Ill-  1 

SUMMARY  OF  FINDINGS  OF  THE  INDUSTRY  STUDY'S  INDUSTRY, 

ASSOCIATION  AND  OTHER  SURVEYS Ill-  2 

LIMITATIONS  OF  THE  DATA Ill-  4 

THE  INDUSTRY  STUDY'S  SURVEY Ill-  6 

METHODOLOGY Ill-  6 

How  the  Firms  Were  Selected  and  Questioned Ill-  6 

Characteristics  of  Responding  Firms Ill-  8 

RESULTS Ill-  9 

Insurance  Coverage Ill-  9 

Cost  of  Insurance III-10 

Trends  in  Deductibles  and  Limits  of  Liability III-12 

Product  Liability  Claims  Experience III-13 

Damages  Paid III-14 

Product  Safety  and  Product  Liability  Prevention 

Programs III-15 

INDUSTRY  ASSOCIATION  AND  OTHER  PRIVATE  SURVEYS III-15 

ORGANIZATION  OF  THE  SURVEYS III-15 

CHARACTERISTICS  OF  RESPONDENTS III-16 

RESULTS III-17 

Insurance  Coverage  and  Availability III-17 

Cost  of  Insurance  and  Claims  in  the  Selected 

Industries III-17 

Products  With  Workplace  Impact III-18 

Products  With  Consumer  Impact III-33 

WHAT  PRIOR  GOVERNMENT  COLLECTED  DATA  SHOW III-44 

INTRODUCTION III-44 

WORKPLACE  INJURIES III-45 

CONSUMER  PRODUCT  INJURIES 111-4? 

NOTES  TO  CHAPTER  III III-49 


X  11 


/ 


TABLE  OF  CONTENTS  (CONTINUED) 


Page 


CHAPTER  IV-PRODUCT  LIABILITY  PREVENTION  TECHNIQUES 


INTRODUCTION IV-  1 

ELEMENTS  OF  A  PRODUCT  LIABILITY  PREVENTION  PROGRAM 

(PLPP) IV-  2 

THE  IMPLEMENTATION  OF  PRODUCT  LIABILITY  TECHNIQUES  BY 

MANUFACTURERS IV-  3 

INTRODUCTION , IV-  3 

RESULTS  OF  INDUSTRY  STUDY'S  TELEPHONE  SURVEY IV-  4 

QUALITY  CONTROL IV-  6 

LABELING  AND  PRODUCT  WARNINGS IV-  7 

PRODUCT  REDESIGN  AND  REMOVAL  OF  PRODUCTS  FROM  THE 

MARKET IV-  8 

RECALL  OF  PRODUCTS IV-  9 

IMPLEMENTATION  OF  PRODUCT  LIABILITY  PREVENTION  PROGRAMS 

BY  INSURERS IV-1  0 

THE  POTENTIAL  USE  OF  PRODUCT  LIABILITY  PREVENTION  PROGRAMS 

IN  THE  FUTURE IV-1  1 

GOVERNMENT  AND  PRODUCT  LIABILITY  PREVENTION IV-1  3 

PRODUCT  STANDARDS IV-1  3 


CHAPTER  V-PRODUCT  LIABILITY  INSURANCE 

INTRODUCTION 

SCOPE  AND  PURPOSE  OF  ANALYSIS 

ORGANIZATION  OF  THE  CHAPTER 

THE  PRODUCT  LIABILITY  INSURANCE  POLICY 

INTRODUCTION 

TYPES  OF  POLICIES 

LIMITS  OF  COVERAGE 

DEDUCTIBLES 

OCCURRENCE  VERSUS  CLAIMS-MADE  POLICIES 

THE  UNDERWRITING  AND  PRICING  PROCESS 

INTRODUCTION 

ISO  RATE  INCREASES V-1  3 


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TABLE  OF  CONTENTS  (CONTINUED) 


Page 


ISO  STATISTICAL  COMPILATION  ACTIVITIES V-14 

THE  RISE  IN  PRODUCT  LIABILITY  PREMIUMS V-17 

INTRODUCTION V-17 

A  COMPARISON  BETWEEN  SMALL  AND  LARGE  BUSINESSES V-1 9 

ALLOCATION  OF  THE  PRODUCT  LIABILITY  PREMIUM  DOLLAR V-23 

PRODUCT  LIABILITY  UNDERWRITING  AND  CLAIMS  EXPERIENCE V-25 

INTRODUCTION V-25 

UNDERWRITING  EXPERIENCE  DATA V-26 

CLAIMS  EXPERIENCE V-29 

Introduction V-29 

The  Preliminary  Report  on  the  ISO  Closed  Claim 

Survey V-29 

Trending V-2  9 

Representativeness  of  the  ISO  Sample V-30 

CONCLUSION V-33 

THE  FINANCIAL  SITUATION  IN  THE  PROPERTY  CASUALTY  INSURANCE 

INDUSTRY V-33 

INTRODUCTION V-33 

RESERVING  PRACTICES V-34 

UNRESOLVED  ISSUES  IN  RESERVING  PRACTICES V-36 

OVERALL  PROPERTY-CASUALTY  EXPERIENCE V-36 

MISCELLANEOUS  LIABILITY  EXPERIENCE V-39 

THE  IMPLICATIONS  OF  THE  FINANCIAL  TRENDS  FOR  PRODUCT 

LIABILITY  INSURANCE  COSTS  AND  AVAILABILITY V-40 

REINSURANCE  AND  SURPLUS  LINES  INSURANCE V-41 

INTRODUCTION V-41 

CHARACTERISITCS  OF  SURPLUS  LINES  INSURANCE  AND  COVERAGE 

TRENDS V-42 

REGULATION  OF  SURPLUS  COMPANIES V-43 

REINSURANCE V-43 

Characteristics  of  Reinsurance  and  Coverage  Trends...  V-43 

Product  Liability  Reinsurance  Premiums V-45 

Regulation  of  Reinsurance V-45 

Impact  of  Reinsurance  and  Surplus  Line  Trends  on 

Product  Liability  Insurance V-46 

CONCLUSIONS V-47 


xiv 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Better  Data  Should  Be  Collected  For  All  Product 
Liability  Insurance  Premiums,  Losses  and  Claims V-48 

Product  Liability  Insurance  Rates  and  Premiums  Should 
Be  More  Closely  Related  to  Statistical  Assessments 
of  Product  Risk V-M8 

Product  Liability  Insurance  Rates  and  Premiums  Should 
Be  Monitored  to  Ensure  That  They  Are  Fair, 
Nondiscriminatory  and  Reasonably  Related  to  Product 
Risk V-4  9 

There  is  a  Need  to  Promote  Greater  Financial 
Disclosure  and  Accountability  in  Product  Liability 
Insurance V-49 

Further  Studies  Should  Be  Undertaken V-50 

NOTES  TO  CHAPTER  V V-51 


CHAPTER  VI -MAJOR  IMPACTS  OF  PRODUCT  LIABILITY 

INTRODUCTION VI-  1 

DISCUSSION  OF  THE  MAJOR  IMPACTS  OF  PRODUCT  LIABILITY VI-  2 

AVAILABILITY  OF  PRODUCT  LIABILITY  INSURANCE VI-  2 

Introduction VI-  2 

Total  Unavailability:  Analysis VI-  3 

Insurance  Study VI-  3 

Industry  Study VI-  4 

Industry  Association  Surveys VI-  5 

State  Insurance  Commissioners VI-  6 

Correspondence  Received  by  the  Task  Force VI-  7 

Product  Liability  Advisory  Committee  to  the  Under 

Secretary  of  Commerce VI-  7 

Partial  Unavailability VI-  7 

Definition VI-  7 

Policy  Limitations VI-  8 

Coverage  Restrictions VI-  9 

Deductibles VI -1  0 

AFFORDABILITY  OF  PRODUCT  LIABILITY  INSURANCE VI-11 


XV 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Introduction VI-1  1 

Product   Liability   Insurance    Rates VI-13 

Product   Liability    Premiums VI-17 

Introduction VI-1  7 

Industry   Study VI-17 

Trade   Associations VI -20 

Correspondence    Received    by   the    Task   Force VI -21 

The    Product    Liability   Advisory    Committee   to    the 

Under    Secretary   of   Commerce VI -23 

Impact   of   Product   Liability    Insurance    Premiums 

Upon    Small    Firms VI -24 

Impacts   of   Product    Liability   Upon    the    Cost   of 

Products VI -27 

PRODUCT  INTRODUCTION  AND  DISCONTINUATION VI -28 

Introduction VI -28 

Analysis VI -2  9 

Industry   Study   Findings VI -29 

Other    Surveys   of   Product   Manufacturers VI -29 

Net    Impact    Upon    Society  of   Product    Liability's 

Inhibiting    Effect   on    New   Product    Development VI-30 

BUSINESS   FAILURES VI-32 

Introduction VI-32 

Analysis VI-32 

Business   Termination    Because   of   Product   Liability 

Premium    Costs VI-32 

Business   Termination    Because   of   Unsatisfied 

Product    Liability   Judgments VI-34 

TRENDS    IN    THE    NUMBER    OF    PRODUCT    LIABILITY   CLAIMS VI-35 

Introduction VI-35 

Analysis VI-36 

Industry   Study VI-36 

Insurance    Services    Office VI-37 

Connecticut    Court    System VI-37 

Federal    Court    System VI-37 

Legal    Study's    Survey  of  Appellate    Cases VI-38 

COMPENSATION   OBTAINED   BY    PERSONS    INJURED   BY    PRODUCTS VI-38 


XVI 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Introduction VI-38 

Analysis VI -39 

THE  RELATIONSHIP  BETWEEN  PRODUCT  LIABILITY  CLAIMS  AND 

PRODUCT  ACCIDENTS VI-39 

Introduction VI-39 

Analysis VI -4  0 

Workplace  Product-Related  Injuries VI-40 

Consumer  Product-Related  Injuries VI-42 

WORKER  COMPENSATION  SYSTEMS VI-43 

Introduction VI-43 

Analysis VI -4 4 

Employee  Product  Liability  Litigation VI-44 

Subrogation VI -46 

PRODUCT  LIABILITY  LOSS  PREVENTION VI-47 

Introduction VI-47 

Analysis VI-49 

Product  Manufacturers'  Loss  Prevention  Programs...  VI-49 

SUMMARY  OF  CONCLUSIONS VI-52 

NOTES  TO  CHAPTER  VI VI -57 

CHAPTER  VII-REMEDIAL  APPROACHES  IN  THE 
FIELD  OF  PRODUCT  LIABILITY 

PART  I-INTRODUCTION VII-1 

THE  SOURCE  AND  SCOPE  OF  REMEDY  ANALYSIS VII-1 

BASIC  CONSIDERATIONS  IN  EVALUATING  REMEDIES VII-2 

ORGANIZATION  OF  THE  DISCUSSION  OF  REMEDIES VII-9 

PART  II-PROPOSED  MODIFICATIONS  OF  SOME  BASIC  PRODUCT 

LIABILITY  LAW  RULES VII-14 

INTRODUCTION VII-14 

THE  BASIC  STANDARD  OF  RESPONSIBILITY  IN  PRODUCT 

LIABILITY  CASES VII-15 

Introduction  to  the  Problem VII-15 

Proposed  Solutions  to  the  Problem VII-17 

Summary  and  Conclusions VII-18 

MODIFICATION  OF  RULES  RELATING  TO  THE  AGE  OF  PRODUCTS...  VII-20 


xvii 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Introduction  to  the  Problem VII-20 

Proposed  Solutions  to  the  Problem VII-21 

Statutes  of  Limitations  or  Repose VII-21 

A  Useful  Life  Duty  Limitation VII-26 

Summary  and  Conclusions VII-28 

A  DUTY  LIMITATION  FOR  UNAVOIDABLY  UNSAFE  PRODUCTS VII-29 

Introduction  to  the  Problem VII-29 

Proposed  Solutions  to  the  Problem VII-31 

Summary  and  Conclusions VII-31 

THE  DEVELOPMENT  OF  PREDICTABLE  LEGAL  STANDARDS  FOR 

PRODUCT  LIABILITY  CASES VII-33 

Introduction  to  the  General  Problem VII-33 

Proposed  Solutions  to  the  Problem VII-33 

State-of-the-Art  Defense VII-33 

Introduction  to  the  Problem VII-33 

Proposed  Solutions  to  the  Problem VII-35 

Summary  and  Conclusions VII-36 

Compliance  with  Legislative  or  Administrative 

Standards  Defense VII-37 

In  General VII-37 

Introduction  to  the  Problem VII-37 

Proposed  Solutions  to  the  Problem VII-38 

Summary  and  Conclusions VII-40 

At  the  Federal  Level VII-40 

Introduction  to  the  Problem VII-MO 

Proposed  Solutions  to  the  Problem VII-41 

Summary  and  Conclusions VII-42 

Regulation  of  Expert  Testimony VII-42 

Introduction  to  the  Problem VII-42 

Proposed  Solutions  to  the  Problem VII-43 

Court-Appointed  Experts VII-43 

A  Test  for  the  Qualifications  of  Experts...  VII-44 

Summary  and  Conclusions VII-45 

MODIFICATIONS  OF  RULES  RELATING  TO  CONDUCT  ON  THE  PART 

OF  PRODUCT  USERS VII-46 

Introduction  to  the  General  Problem VII-46 


XV  11  1 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

The  Problem  of  Product  Misuse VII-M? 

Introduction  to  the  Problem VII-M? 

Proposed  Solutions  to  the  Problem VII-47 

Standardizing  Foreseeable  Misuses  for  the 

Purposes  of  Tort  Law VII-48 

Plaintiff's  Misuse  of  Products  and  Comparative 

Fault  Principles VII-49 

Alteration  or  Misuse  of  a  Product  by  a  Third 

Party  —  Shifting  Responsibility VII-49 

The  Problem  of  Plaintiff's  Contributory  Fault  or 

Assumption  of  Risk  and  Proposed  Solutions VII-51 

Modification  of  Rules  Relating  to  Conduct  on  the 
Part  of  Product  Users  --  Summary  and  Conclusions...  VII-54 
PART  III-PROPOSED  MODIFICATIONS  OF  SOME  BASIC  PRODUCT 

LIABILITY  LAW  RULES  THAT  RELATE  TO  DAMAGES VII-56 

INTRODUCTION  TO  THE  GENERAL  PROBLEM VII-56 

ATTORNEYS'  FEES VII-56 

Introduction  to  the  Problem VII-56 

Proposed  Solutions  to  the  Problem VII-58 

The  Contingent  Fee  --  Elimination  or 

Modification? VII-58 

Will  Elimination  or  Modification  of  the 
Contingent  Fee  Lower  Product  Liability 

Rates? VII-58 

Some  of  the  Major  Policy  Considerations 
Relating  to  the  Elimination  or  Reduction  of 

the  Contingent  Fee VII-59 

Eliminate  Damages  for  Pain  and  Suffering  and 
Allow  a  Court  to  Award  Plaintiff  His  Attorney's 

Fee VI I -61 

Impose  a  Penalty  for  Filing  Suits  Without 

Reasonable  Cause VII-62 

Summary  and  Conclusions VII-63 

REGULATION  OF  DAMAGE  AWARDS  FOR  PAIN  AND  SUFFERING VII-64 

Introduction  to  the  Problem VII-64 

Proposed  Solutions  to  the  Problem VII-67 


X  IX 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Abolish  Awards  for  Pain  and  Suffering VII-67 

Limit  Awards  for  Pain  and  Suffering  to  a  Specific 

Multiple  of  Special  Damages VII-68 

Limit  Awards  for  Pain  and  Suffering  to  a  Fixed 

Ceiling VII-68 

Limit  Awards  for  Pain  and  Suffering  to  a  Fixed 
Schedule  Based  on  the  Type  of  Injury  Plaintiff 

Endured VII-69 

Summary  and  Conclusions VII-69 

MODIFICATION  OF  THE  COLLATERAL  SOURCE  RULE VII-70 

Introduction  to  the  Problem VII-70 

Proposed  Solutions  to  the  Problem VII-73 

Abolish  the  Collateral  Source  Rule VII-73 

Modify  the  Collateral  Source  Rule VII-73 

Authorize  the  Introduction  of  Collateral  Sources 

in  Evidence VII-7^ 

Summary    and    Conclusions VII-75 

RESTRICTIONS    ON   AWARDING    PUNITIVE    DAMAGES VII-75 

Introduction    to    the    Problem VII-75 

Proposed    Solutions   to    the    Problem VII-78 

A    Method    to    Reduce    the    Impact   of   the    Multiple 

Punitive    Damage    Award VII-78 

Should    Punitive   Damages   be    Paid    to    a   Source    Other 

than    Plaintiff? VII-79 

Summary   and    Conclusions VII-80 

REPLACING   LUMP   SUM    DAMAGES   WITH   A    PERIODIC    PAYMENT 

SYSTEM VII-80 

Introduction    to    the    Problem VII-80 

Proposed    Solutions    to    the    Problem VII-81 

Replace    Lump    Sum   Payment    Awards    with    a    Periodic 

Payment    System VII-81 

How   a    Periodic    Payment    System    Might    Function VII-82 

Summary    and    Conclusions VII-84 

FOOTNOTES VII-84 


XX 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

PART  IV-PROPOSED  MODIFICATIONS  OF  PRODUCT  LIABILITY  RULES 
RELATING  TO  A  DEFENDANT'S  RIGHT  AGAINST  THIRD  PARTIES  — 
THE  PROBLEM  OF  THE  WORKPLACE  INJURY 

INTRODUCTION  TO  THE  GENERAL  PROBLEM VII-85 

PROPOSED  SOLUTIONS  TO  THE  PROBLEM VII-87 

Contribution  and  Indemnity  Claims  --  In  General VII-87 

Contribution  and  Indemnity  as  Applied  to  Injuries 

in  the  Workplace VII-88 

Allow  Full  Contribution  by  a  Manufacturer  Based 
on  the  Comparative  Responsibility  of 
Manufacturers  and  Employers  in  Regard  to  a 

Product  Work-Related  Accident VII-89 

Allow  Manufacturers  Limited  Contribution  Claims 
Up  to  the  Amount  of  the  Employers'  Worker 

Compensation  Payment VII-92 

If  Legislation  is  Enacted  Allowing  Manufacturers 
Contribution  Claims,  the  Matter  of  Employer 
Coverages  for  Such  Claims  Should  be  Considered..  VII-92 
Worker  Compensation  Insurance  --  Experience 

Rated VI 1-93 

A  Federal  Law  Allowing  Contribution  by  a 

Manufacturer  Against  a  Negligent  Employer VII-93 

Summary  and  Conclusions VII-95 

Prohibition  or  Modification  of  Subrogation  by  Worker 

Compensation  Carriers VII-95 

Introduction  to  the  Problem VII-95 

Proposed  Solutions  to  the  Problem VII-97 

Abolish  the  Right  of  Subrogation VII-97 

Modify  the  Right  of  subrogation VII-98 

Summary  and  Conclusions VII-99 

Validation  of  Hold  Harmless  Agreements VII-99 

Introduction  to  the  Problem VII-99 

Proposed  Solutions  to  the  Problem VII-101 

Summary  and  Conclusions VII-102 


XXI 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Worker  Compensation  as  a  Sole  Source  of  Recovery  — 

Abolishing  the  Workers'  Third-Party  Claim VII-103 

Introduction  to  the  Problem VII-103 

Proposed  Solutions  to  the  Problem VII-108 

Summary  and  Conclusions VII-112 

FOOTNOTES VII-1  13 

PART  V-PROPOSED  MODIFICATIONS  OF  PRODUCT  LIABILITY 
INSURANCE  MECHANISMS 

INTRODUCTION  TO  THE  GENERAL  PROBLEM VII-1  14 

RESIDUAL  INSURANCE  MARKET  MECHANISMS VII-1  15 

Residual  Insurance  Market  Mechanisms  --  at  the  State 

or  Federal  Level VII-115 

Residual  Insurance  Market  Mechanisms  --  Under  What 

Circumstances  Should  They  Be  Subsidized? VII-1  18 

Introduction  to  the  Problem VII-1  18 

Justification  for  a  Subsidy VII-119 

Analogous  Areas  Where  Federal  Subsidies  Have  Been 

Used  in  the  Past VII-123 

Summary  and  Conclusions VII-125 

Assigned  Risk  Plans VII-127 

Introduction  to  the  Problem VII-127 

Application  of  Assigned  Risk  Plans  in  the  Area 

of  Product  Liability  —  Some  Problems VII-128 

Eligibility  Requirements VII-128 

Allocation  of  Assignment VII-129 

Determining  Individual  Premium  Rates VII-129 

Inadequate  Coverage  Problems VII-130 

Summary  and  Conclusions VII-130 

Pooling  Mechanisms VII-130 

Introduction  to  the  Problem VII-130 

Proposed  Solutions  to  the  Problem VII-132 

Voluntary  Pooling  Mechanisms VII-132 

Mandatory  Pooling  Mechanisms  --  Joint 

Underwriting  Associations VII-135 

Introduction VI 1-135 


xxii 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Application  of  Mandatory  Pooling  Mechanisms 
in  the  Area  of  Product  Liability  —  Some 

Problems VII-1  36 

Disruption  Factors VII-136 

How  Long  Should  the  Pooling  Mechanism 

Be  in  Operation? VII-137 

Should  the  Pooling  Mechanism  be  the 
Exclusive  Source  of  Product  Liability 

Insurance? VII-1  38 

Which  Insurers  Should  be  Required  to  be 

Members  of  the  Pooling  Mechanisms? VII-139 

How  Should  the  Assessment  Basis  for  the 

Pooling  Mechanism  be  Determined? VII-140 

How  Should  Losses  be  Recouped? VII-141 

Other  Major  Issues  Concerning  Mandatory 
Product  Liability  Insurance  Pooling 

Mechanisms VII-1  42 

Summary  and  Conclusions VII-142 

Federal  Insurance  and  Reinsurance VII-143 

Introduction  the  the  Problem VII-143 

Direct  Federal  Insurance VII-143 

Federal  Reinsurance VII-145 

Reinsurance  —  What  Is  It? VII-146 

Can  Federal  Reinsurance  Ease  Product  Liability 

Rates  for  Individual  Insureds? VII-147 

Is  Federal  Reinsurance  a  Long-  or  a  Short- 

Range  Remedy? VII-148 

Who  Should  Be  Eligible  to  Participate  in  the 

Reinsurance  Mechanism VII-150 

Summary  and  Conclusions VII-152 

Captive  Insurance  Companies VII-154 

Introduction  to  the  Problem VII-154 

Analysis  of  the  Potential  Advantages  of  Captive 

Insurance  Companies VII-155 

Benefits  of  Captives  --  A  Summary VII-160 

Proposed  Solutions  to  the  Problem VII-160 


XXlll 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Modifying  Insurance  Regulations  for  Captives..  VII-161 

Incentives  Based  on  Tax  Savings VII-164 

Overall  Summary  and  Conclusions VII-167 

Structured  Self-Insurance  Programs VII-167 

Introduction  to  the  Problem VII-167 

Proposed  Solutions  to  the  Problem VII-I59 

Summary  and  Conclusions VII-172 

MANDATORY  PRODUCT  LIABILITY  PREVENTION  PROGRAMS VII-172 

Introduction  to  the  Problem VII-172 

Proposed  Solutions  to  the  Problem VII-175 

Require  Manufacturers  to  use  Reasonable  Product 
Liability  Prevention  Techniques  as  a  Quid  Pro 
Quo  for  Participation  in  Government  Reinsurance 

or  Pooling  Programs VII-175 

Require  Insurers  to  Build  into  Their  Product 
Liability  Rates  an  appropriate  Discount  When 
Insureds  Use  Proper  Product  Liability 

Prevention  Techniques VII-177 

Require  Insurers  to  Assist  in  Loss  Prevention 

Activity  on  Behalf  of  Their  Insureds VII-180 

Increase  Government  Action  to  Assist  Businesses 

in  the  Area  of  Product  Liability  Prevention VII-183 

Summary  and  Conclusions VII-186 

REMEDIES  DESIGNED  TO  ELIMINATE  UNSATISFIED  JUDGMENTS...  VII-187 

Introduction  to  the  General  Problem VII-187 

Proposed  Solutions  to  the  Problem VII-189 

Do  Data  Show  that  Mandatory  Product  Liability 
Insurance  Laws  or  Unsatisfied  Judgment  Funds 

are  Needed? VII-189 

Mandatory  Product  Liability  Insurance  Laws VII-191 

Introduction  to  the  Problem VII-191 

Which  Manufacturers  Would  Be  Covered  by  the 

Law? VII-191 

How  Much  Coverage  Would  be  Necessary? VII-193 

Relationship  With  Residual  Insurance 

Mechanisms VII-195 


XX  IV 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Relationship  With  No-Fault  Compensation 

Systems VI I -195 

Unsatisfied  Judgment  Funds VII-195 

Introduction  to  the  Problem VII-195 

The  Source  of  Revenue  for  an  Unsatisfied 

Judgment  Fund VII-1  96 

Procedure  for  Recovery  Against  the  Fund VII-1 97 

Limitation  on  Amounts  Paid  Out  of  the  Fund....  VII-198 
Summary  and  Conclusions  --  Comparison  of  Mandatory 
Product  Liability  Insurance  and  Unsatisfied 

Judgment  Funds VII-1  99 

FOOTNOTES VII-200 

PART  VI-ALTERNATIVE  METHODS  FOR  COMPENSATING  CONSUMER 
PRODUCT  INJURIES:   HEREIN  NO-FAULT  COMPENSATION  SYSTEMS 
AND  ARBITRATION 

INTRODUCTION  TO  THE  GENERAL  PROBLEM VII-202 

NO-FAULT  COMPENSATION  SYSTEMS VII-202 

Introduction  the  the  Problem VII-202 

No-Fault  Systems  --  A  Description VII-203 

The  Government's  Role  in  a  Product  Liability 

No-Fault  Compensation   System VII-209 

Alleged  Benefits  of  a  No-Fault  Product  Liability 

System VI I -2 12 

Some  Major  Problems  with  the  Use  of  First-Party 

No-Fault  Systems  in  Product  Liability  Cases VII-217 

Summary  and  Conclusions VII-228 

ARBITRATION VII-229 

Introduction  to  the  Problem VII-229 

Proposed  Solutions  to  the  Problem VII-230 

The  Format  of  Arbitration  in  Product  Liability 

Cases VII-230 

Constitutional  Problems  with  Compulsory 

Non-Binding  Arbitration VII-232 

Structure  of  the  Arbitration  Panel VII-234 


XXV 


TABLE  OF  CONTENTS  (CONTINUED) 

Page 

Alleged  Benefits  of  a  Product  Liability 

Arbitration  Process VII-234 

Summary  and  Conclusions VII-238 

FOOTNOTES VII-240 

PART  VII-SYNTHESIS  OF  CHAPTER  AND  CONCLUSIONS VII-242 


XXVI 


List  of  Tables 


No. 


Page 


II-1      Federal  District  Courts  Product  Liability  Cases: 

Total  Breakdown 11-74 

II-2      Federal  District  Courts  Product  Liability 

Cases--Breakdown  by  Percentage 11-74 

II-3      Federal  District  Courts  Product  Liability 

Cases--Compar ison  to  Total  Civil  Cases 11-75 

II-4      Federal  District  Courts  Product  Liability 

Cases--Personal  Injury  Torts 11-75 

II-5      Connecticut  Court  of  Common  Pleas--TGtal  Product 

Liability  Breakdown 11-76 

II-6      Connecticut  Superior  Court--Total  Product 

Liability  Breakdown 11-77 

II-7     Key  Statistical  Breakdown--Total  Cases  For 

Survey  Undertaken  in  Legal  Study 11-78 

II-8     Key  Statistical  Breakdown--Trend :   Product 

Class 11-78 

II-9      Key  Statistical  Breakdown--Time  Interval  Between 
Year  of  Manufacture  and  Year  of  Injury  By 
Product  Class 11-79 

11-10     Key  Statistical  Breakdown:  Forum 11-79 

11-11     Key  Statistical  Breakdown--Trend :   Total  Damages 

Awarded 11-80 

11-12     Key  Statistical  Breakdown--State  or  Federal 

Court  Forum 11-80 


xxvii 


No .  Page 

11-13     Increase  in  Number  of  Reported  Cases:   1965-70 

V.  1971-76 11-81 

11-1^     Key  Statistical  Breakdown--Work-  and  Non-Work- 
Related  Cases 11-81 

11-15     Key  Statistical  Breakdown--Disposition 11-82 

11-16     Key  Statistical  Breakdown--Damages 11-82 

III-1     Number  of  Firms  in  the  Sample,  Number  of 

Responses  and  Response  Rates,  By  Product  and 

Sales  Categories III-50 

III-2     Average  Total  Gross  Sales  Per  Firm,  By  Product 
and  Sales  Category — 1975  (thousands  of 
dollars) II I -51 

III-3    Extent  of  Current  Product  Liability  Coverage, 

By  Size  of  Category III-52 

III-4     Reasons  For  Not  Carrying  Product  Liability 

Insur ance--Percent  of  Total  Responses  By  Size 

Category III-53 

III-5    Comprehensive  General  Liability  Coverage-- 

Average  Cost  Per  $1,000  Sales — 1971  to  1976, 

By  Size  Category III-54 

III-6     Estimated  Average  Product  Liability  Insurance 
Cost  Per  $1,000  Sales  Under  Comprehensive 
General  Liability  Plans  By  Size 
Category-1971-76 Ill -55 

III-7    Estimated  Average  Primary  Product  Liability 

Insurance  Costs  Per  $1,000  In  Designated  Product 
Category  Sales--1  971 -76 III-56 

III-8     Umbrella  Coverage  Average  Costs  Per  $1,000, 

By  Size  Category  — 1  97  1 -76 III-57 


XXVlll 


No .  Page 

III-9     Average  Deductible  or  Self-Insurance  Retention 
Levels,  By  Size  Category — 1971-76  (thousands 
of  dollars) II I -58 

III-10    Number  and  Percent  of  Firms  Reporting  Any 
Product  Liability  Claims,  By  Size 
Category  — 1971-76 II I -59 

III-1 1    Average  Number  of  Pending  Claims,  By  Product 

Category  — 1971-76 II I -60 

III-12    Average  Number  of  New  Claims  per  Firm  By  Size 

Category  — 1971-76 II I -61 

III-13    Average  Number  of  new  Claims  per  Firm  By 

Product  Category  — 1971-76 III-62 

III-14    Total  Damages  Sought  in  Pending  Claims,  Average 
Amount  Per  Firm,  By  Size  Category — 1971-76 
(thousands  of  dollars) III-63 

III-15    Total  Damages  Sought  in  New  Claims,  Average 
Amount  Per  Firm,  By  Size  Category--1 97 1 -76 
(thousands  of  dollars) III-64 

III-16    Average  Annual  Settlement  Amounts  Per  Firm  By 

Size  Category — 1971-76  (thousands  of  dollars)...   III-65 

III-17    Summary  of  Trade  Associations  and  Other 

Organizations  Participating  in  the  Product 

Liability  Study III-66 

III-18    Size  Characteristics  of  Respondents  to  the  Trade 

Association  Surveys III-67 

III-19    Reasons  Given  for  Not  Carrying  Product  Liability 

Insurance  in  Trade  Association  Surveys III-68 

III-20    Product  Liability  Insur ance--Average  Annual  Cost 

Per  Thousand  Dollars  of  Sales — (ATMA) III-69 


XXIX 


No  .  Page 

III-21    Claims  Experience  of  Reporting  Firms — (ATMA)....   III-70 

III-22    Product  Liability  Insur ance--Average  Annual  Cost 

Per  Thousand  Dollars  of  Sales — (IHEA) III-71 

III-23    Claims  Experience  of  Reporting  Firms — (IHEA)....   III-72 

III-24    Claims  Experience  During  the  Period  From  1970  to 

1  975-- (MAPI) III-73 

III-25    Claims  Experience  of  Reporting  Firms--(RPI) III-74 

III-26    Insurance  Cost  Per  Firm — (WMMA) III-74 

III-27    Claims  Experience  of  Reporting  Firms-- (WMMA) ... .   III-75 

III-28    Primary  Product  Liability  Insurance--Average  and 
Median  Annual  Costs  Per  Thousand  Dollars  of 
Sales-- (SPI) III-76 

III-29   Claims  Experience  For  All  Respondents — (SPI)....   III-77 

III-30    Primary  Product  Liability  Insurance--Average 
Annual  Cost  Per  Thousand  Dollars  of 
Sales.  — (CMF) II I -7  8 

III-31    Claims  Experience  of  Reporting  Firms--(CMF) III-79 

III-32    Average  Insurance  Costs  Per  Firm — (ADCI) III-80 

III-33    Product  Liability  Insurance-Average  Annual  Cost 

Per  Thousand  Dollars  of  Sales-(RVIA) III-81 

III-34    Claims  Experience  Since  1970,  By  Size  of 

Firm.  — (ATM  I) II 1-82 

III-35    Product  Liability  Insurance-Average  Annual  Cost 

Per  Thousand  Dollars  of  Sales- (WWEMA) III-83 

III-36    Claims  Experience  of  Reporting  Firms- (WWEMA) ... .   III-84 


xxx 


No. 


Page 


IV-1      Reported  Impact  of  Selected  Product  Safety 

Programs IV-1  8 

IV-2      Special  Product  Liability  Prevention  Programs, 

By  Size  of  Sales  Category IV-19 

IV-3      Special  New  Programs  Considered  in  the  Last  Year 

to  Reduce  Claims,  By  Size  of  Sales  Category IV-20 

V-1       Number  of  Companies  With  Per  Occurrence 

Deductibles V-54 

V-2      Average  Deductible  or  Self-Insurance  Retention 

Levels  By  Sales  Category  1971-76 V-55 

V-3      Product  Liability  Rating  Methods..... V-56 

V-4      Basic  Monoline  Rate  Increases  for  Product 
Liability  Insurance  December  1976  and  Over 
August  1975 V-57 

V-5       Increased  Limits  Factors  For  Bodily  Injury  and 

Property  Damage V-59 

V-6       Product  Liability  Classes  With  Monoline  Premiums 

of  $10  or  More  Per  $1,000  of  Sales V-60 

V-7       Effect  of  ISO  Revisions  on  Product  Liability 

Premium  Rates V-61 

V-8       Rate  Increases  in  (a)  Rated  Products V-62 

V-9       Estimated  Average  Product  Liability  Cost  Per 
$1,000  in  Total  Sales  Under  Comprehensive 
General  Liability  Plans  1971-76 V-63 

V-10     Comprehensive  General  Liability  Coverage  Average 
Cost  Per  $1,000  Sales  By  Product  and  Size 
Categories  1976 V-64 


XXXI 


No. 


Page 


V-1 1  Comparative    Analysis   of   Leading    Indicators    for 

Small,    Medium    and    Large   Firms V-65 

V-12  Estimated    Allocation   of   Product   Liability 

Premium    Dollar V-66 

V-13  Estimated    Allocation   of   Total    1976    Product 

Liability   Premiums V-67 

V-IM  Product   Liability    Insurance    Underwriting 

Experience,    Bodily    Injury   and    Property    Damage 

Combined    1969-74 V-68 

V-15             Product   Liability    Insurance    Incurred    Losses, 
Bodily    Injury   and    Property   Damage    Combined 
1969-74 V-69 

V-16  Product   Liability   Insurance    Incurred    Losses, 

Bodily    Injury    1969-74 V-70 

V-17  Product   Liability    Insurance    Incurred    Losses, 

Property   Damage    1969-74 V-71 

V-18  Products    Generating    Most    Payment    Dollars,    Bodily 

Injury    (Untrended    and    Trended) V-72 

V-1 9  Products   Generating    Most    Payment    Dollars, 

Property    Damage    (Untrended    and    Trended) V-73 

V-20  Product    Liability    Claims,    Time    Interval    From 

Date    of   Occurrence    to    Date    of   First    Report, 
Bodily    Injury   and    Property   Damage    (Untrended)...  V-74 

V-21              Product    Liability    Claims,    Time    Interval    From 
Date   of   Occurrence   to    Date   of   Closing,    Bodily 
Injury   and    Property    Damage    (Untrended) V-75 

V-22  Distribution    of    Product    Liability    Claims    By 

Injured    Party's    Status    in    Occurrence    (Untrended 

and    Trended) V-76 


XXXll 


No. 


Page 


V-23     Product  Liability  Closed  Claim  Costs  By  Stage  Of 

Legal  System  (Untrended) V-77 

V-24     Distribution  of  Paid  Bodily  Injury  Claims  and 

Losses,  1976  Calendar  Year  (Liberty  Mutual) V-78 

V-25     Annually  Adjusted  Incurred  Loss  Estimates,  10 
Leading  Writers  of  Miscellaneous  Liability 
Insurance  1972-75 V-79 

V-26     Property  Casualty  Insurance  Industry:   Estimates 

of  Financial  Operating  Results  1971-76 V-80 

V-27     Total  Property-Casualty  and  Miscellaneous 

Liability  Premiums  1972-76 V-81 

V-28     Property-Casualty  and  Miscellaneous  Liability 

Combined  Loss  Ratios  After  Dividends  1972-76....     V-81 

V-29     Loss  Ratios  and  Aggregate  Premiums,  10  Leading 
Writers  of  Miscellaneous  Liability  Insurance 
and  Total  Industry  1972-76 V-82 

V-30     Range  in  Loss  Ratios  for  10  Leading  Writers  of 

Miscellaneous  Liability  Insurance  1972-76 V-82 

V-31      Surplus  Line  Premiums  Reported  By  Major  State 

Insurance  Departments  1972-75 V-83 

V-32     Total  American  Reinsurance  1960-75 V-8^ 


xxxiii 


EXECUTIVE  SUMMARY  FOR  THE  FINAL  REPORT  OF  THE 
FEDERAL  INTERAGENCY  TASK  FORCE  ON  PRODUCT  LIABILITY 

THE  NATURE  OF  THIS  REPORT 

This  report  is  the  culmination  of  over  one  year  of  intensive 
study  about  the  topic  of  product  liability.  It  describes  the 
causes,  nature  and  scope  of  problems  that  have  arisen  in  that 
area.  Also,  it  analyzes  potential  cures  or  remedies  that  have 
been  proposed  as  solutions  for  those  problems. 

The  topic  of  product  liability  deals  with  the  full  scope  of 
how  our  legal  and  private  insurance  systems  compensate  persons 
who  are  injured  by  products.  It  defines  the  responsibility  of 
retailers,  distributors  and  manufacturers  for  products  that  cause 
injury.  In  1975,  an  apparent  problem  arose  in  the  field  of 
product  liability.  A  number  of  manufacturers  and  business 
periodicals  alleged  that  product  liability  insurance  had  become 
unavailable  or  unaf fordable .  After  some  initial  investigation,  a 
Federal  Interagency  Task  Force  was  established  by  the  White  House 
to  study  the  product  liability  problem  and  report  back  to  it  on 
or  before  December  15,  1976.  A  report  based  on  that  document, 
entitled  "The  Federal  Interagency  Task  Force  on  Product  Liability 
Briefing  Report"  was  released  to  the  public  on  January  4,  1977. 
The  Briefing  Report  was  based  on  preliminary  drafts  of  three 
independent  contractor  studies  commissioned  by  the  Task  Force  as 
well  as  pre-December  1,  1976  data  and  information.  The 
independent  contractor  reports  were  in  the  legal,  insurance  and 
industry  areas. 

This  report  is  based  on  the  final  versions  of  the  contractor 
reports   and  a  wide  array  of  resources  set  forth  at  pp.  1-7  -  17. 


MAJOR  IMPACTS  OF  THE  PRODUCT  LIABILITY  PROBLEM 

Introduction 

Major  impacts  of  the  product  liability  problem  are  discussed 
in  Chapter  VI  of  this  report.  A  very  highly  condensed  summary  of 
those  findings  is  set  forth  here.  The  full  discussion  in  Chapter 
VI  shows  that  very  little  solid   information   is   available   with 


xxxiv 


respect  to  some  of  these  topics,  e.g.,  the  number  of  product 
liability  claims  filed  annually.  Nevertheless,  the  report 
discusses  those  subjects  in  order  to  abate  the  growing  amount  of 
misinformation  that  has  been  set  forth  about  product  liability. 
Chapter  III  of  this  report  sets  forth  detailed  findings  based  on 
the  industry  contractor's  independent  survey  of  337  corporations 
and  20  trade  associations.  These  findings  are  summarized  at  pp. 
III-2  -  4.  of  this  report  and  analyzed  in  that  chapter. 

In  Chapter  II  of  this  report  we  set  forth  our  legal 
contractor's  review  of  product  liability  data  that  have  been 
derived  directly  from  the  legal  system.  The  first  section 
describes  the  very  limited  data  that  could  be  found  about  product 
liability  claims  and  settlements  from  legal  sources.  See  pp.  II- 
43  -  47.  Only  the  State  of  Connecticut  and  the  Federal  courts 
(both  since  1974)  collect  these  data. 

The  second  section  sets  forth  the  results  of  a  product 
liability  survey  undertaken  by  the  legal  contractor.  The 
contractor  surveyed  655  appellate  cases  from  eight  representative 
states.  See  pp.  11-47  -  57.  The  data  from  Chapter  II  have  been 
used,  where  possible,  in  describing  major  impacts. 

SUMMARY  OF  MAJOR  IMPACTS  OF  THE  PRODUCT  LIABILITY  PROBLEM 

Availability  of  Product  Liability  Insurance 

Total  Unavailability 

There  is  no  widespread  problem  of  product  liability  insurance 
being  unavailable.  A  few  companies  in  the  Task  Force's  target 
industries  and  other  high-risk  product  lines  are  having 
difficulty  obtaining  product  liability  insurance.  For  some 
others,  product  liability  rates  would  appear  to  be  unaf fordable-- 
it  has  been  persuasively  argued  to  the  Task  Force  that  this  is  a 
practical  equivalent  of  unavailability. 

Partial  Unavailability 

Policy  limitations. --Policy  limitations  that  insurance 
companies  have  been  willing  to  offer  for  products  coverage  do  not 
appear  to  have  changed  significantly  since  1971.   Thus,  insurance 


XXXV 


companies  are  not  forcing  insureds  to  retain  more  risks  by 
reducing  the  amount  of  coverage  that  they  are  willing  to  make 
available.  On  the  other  hand,  some  underwriters  are  reluctant  to 
increase  the  limits  of  liability  for  existing  coverage.  Thus, 
some  manufacturers  whose  products'  risk  exposure  appears  to  be 
increasing  may  be  unable  to  protect  themselves  against  that 
increase  by  raising  the  limits  of  their  products  coverage. 

Coverage  restrictions . — Task  Force  information  sources  were 
not  wholly  in  accord  on  the  question  of  whether  coverage 
restrictions  were  increasing.  The  Industry  Study  found 
restrictions  on  products  coverage  to  be  more  prevalent  than  the 
Insurance  Study,  which  concluded  that  coverage  exclusions  are 
rarely  imposed  by  insurance  companies.  Major  product  liability 
insurers  appear  to  be  willing  to  write  coverage  for  most  product 
lines.  Smaller  insurance  companies  may  exclude  some  very  high- 
risk  products  from  their  General  Comprehensive  Liability 
coverage . 

Deductibles . — Deductibles  appear  to  be  increasingly  prevalent 
among  our  target  industry  groups.  Furthermore,  the  levels  of 
deductibles  appear  to  have  increased  significantly  between  1975 
and  1976  for  both  large-  and  medium-sized  firms  in  our  target 
industry  groups.  This  increase  in  the  frequency  and  level  of 
deductibles  may  be  a  matter  of  choice  on  the  part  of  insureds 
rather  than  a  requirement  of  the  insurance  companies. 

Af f ordabil ity  of  Product  Liability  Insurance 


As 


it   affects   insureds. — There   has   been 


substantial 


increase  in  the  cost  of  product  liability  insurance  since  197^  in 
all  of  the  Task  Force's  target  industries.  The  increase  in 
premiums  appears  to  have  been  greater  for  small  as  compared  to 
large  businesses.  Also,  small  firms  appear  less  able  to  cope 
with  af fordabil ity  problems  than  large  firms.  Certain  industries 
appear  to  have  been  subject  to  very  substantial  increases.  These 
include  manufacturers  of  medical  devices,  pharmaceuticals,  power 
lawnmowers,  industrial  chemicals  and  metal  castings.  Anecdotal 
data  show  similar  impacts  on  manufacturers  of  sporting  goods  and 
ladders.  In  some  instances  manuf acturers--especially  of  durable 
goods--may  not  be  able  to  pass  this  increased  cost  on  to  their 
customers . 


xxxvi 


As  it  affects  the  price  of  products . — One 
measure  the  exact  cost  of  product  liability  insura 
the  price  of  a  product.  The  average  cost  of  pr 
insurance  is  less  than  1  percent  of  sales  in  most 
Force's  target  industries,  but  it  is  hi 
manufacturers.  The  total  cost  of  product  liabilit 
it  affects  the  price  of  a  product  may  be  abov 
figure  because  distributors  and  retailers  may  also 
cost  of  their  product  liability  insurance 
Furthermore,  other  product  liability  costs,  i 
product  liability  premiums,  may  be  reflected  in 
product . 


cannot  readily 
nee  as  part  of 
oduct  liability 
of  the  Task 
gher  for  some 
y  insurance  as 
e  the  1  percent 
pass  on  the 
to  purchasers, 
n   addition   to 

the  price  of  a 


Product  Introduction  and  Discontinuation 


Product  liability  problems  in  the  pharmaceutical  and  other 
high-risk  product  lines  may  reinforce  trends  against  new  product 
development  with  the  result  that  some  socially  beneficial 
products  may  never  be  developed  or  may  be  discontinued.  This  is 
especially  true  for  smaller  firms.  On  the  other  hand,  some  of 
the  products  that  are  not  produced  (or  are  discontinued)  may  be 
ones  whose  potential  for  causing  harm  outweighs  their  social 
utility.   This  is  an  area  that  deserves  further  investigation. 

Business  Failures 

Product  liability  problems  do  not  appear  to  have  been  a 
direct  and  sole  cause  of  business  failures.  On  the  other  hand, 
circumstantial  evidence  suggests  that  substantial  product 
liability  premium  increases  may  be  one  of  several  factors  that 
cause  small  businesses  in  high-risk  product  industries  to  go  out 
of  business.  In  the  future,  some  small  businesses  may  be  placed 
in  default  by  product  liability  judgments. 

Trends  in  the  Number  of  Product  Liability  Claims 

No  organization,  public  or  private,  currently  records  all 
product  liability  claims  or  lawsuits.  The  best  "estimate"  of  the 
number  of  product  liability  claims  filed  in  1976  is  between 
60,000  and  70,000.  Data  are  not  available  that  would  provide  a 
firm  indication  of  the  trends  in  the  number  of  product  liability 
claims  in  the  197^-1976  period.   In  our   target   industries,   the 


xxxvii 


average   number   of   pending   claims   appears 
substantially  between  1971  and  1976. 


to   have  increased 


Compensation  Obtained  by  Persons  Injured  by  Products 

A  small  percentage  of  persons  injured  by  products  file 
product  liability  claims.  There  is  little  information  available 
regarding  the  compensation  obtained  by  claimants,  although,  a 
preliminary  closed  claim  survey  suggests  that  a  relatively  high 
percentage  receive  their  medical  expenses,  wage  losses  and  other 
out-of-pocket  expenses  other  than  legal  fees.  A  recent  Insurance 
Services  Office  closed  claim  survey  and  other  data  sources 
suggest  that  less  than  6  percent  of  product  liability  claims  are 
litigated  to  a  final  court  verdict.  Of  those  who  litigate  cases, 
less  than  50  percent  recover  any  damages. 

The  Relationship  Between  Product  Liabil ity 
Claims  and  Product  Accidents 

Limited  data  collected  by  our  Industry  Study  suggest  that  any 
increase  in  product  liability  claims  in  the  majority  of  our 
target  industries  is  not  due  to  an  increase  in  the  number  of 
product-related  accidents.  This  finding  appears  to  be  firmer  in 
regard  to  workplace  products  than  consumer  products. 

Worker  Compensation  Systems 

Some  persons  injured  by  products  in  the  workplace  are 
supplementing  their  Worker  Compensation  recovery  by  the  use  of 
product  liability  suits.  Worker  Compensation  insurers  and  self- 
insuring  manufacturers  or  distributors  are  able  to  recoup  some  of 
their  injury  compensation  costs  through  subrogation  in  product 
liability  claims.  These  claims  would  appear  to  have  only  a  very 
minor  impact  on  the  Worker  Compensation  system.  Insurers  stress 
that  workplace  accidents  and  resultant  product  liability  claims 
have  been  an  important  cause  of  the  product  liability  insurance 
rate  increases  that  have  been  generated  for  industrial  products 
within  our  target  groups. 


XXXVlll 


Product  Liability  Loss  Prevention 

The  tort-litigation  system  and  increased  product  liability 
insurance  costs  have  caused  many  manufacturers  of  high-risk 
products  to  devote  more  time  and  resources  to  product  liability 
loss  prevention;  however,  a  number  of  such  businesses  have  not 
done  so.  Limited  data  show  that  a  much  higher  percentage  of 
large,  as  opposed  to  small  manufacturers,  have  implemented 
product  liability  loss  prevention  programs.  Also,  insurers 
appear  to  have  supplied  product  liability  advice  more  frequently 
to  large  insureds  than  to  small  ones.  In  addition,  company 
executives  interviewed  by  the  industry  contractor  did  not 
perceive  a  direct  correlation  between  the  implementation  of 
product  liability  loss  prevention  programs  and  a  reduction  in 
insurance  costs. 

THE  PRINCIPAL  CAUSES  OF  THE  PRODUCT  LIABILITY 
PROBLEM  AND  THEIR  REMEDIES 

Introduction 

The  Task  Force's  Briefing  Report  identified  three  principal 
causes  of  the  product  liability  problem--liabil ity  insurance 
ratemaking  procedures,  the  tort-litigation  system,  and 
manufacturing  practices--and  their  remedies.  Little  has  changed 
in  the  intervening  months  to  alter  the  Task  Force's  perspective 
about  the  principal  causes.  This  report  does  not  rank  these 
causes  in  a  hierarchical  chain;  data  do  not  permit  a  conclusion 
that  one  cause  is  more  important  than  the  other.  Lesser  causes 
include  inflation,  consumer  and  worker  awareness  of  their  legal 
rights,  increases  in  the  number  and  complexity  of  products,  and 
product  misuse. 

There  is  a  tendency  for  each  group  that  has  a  special 
interest  in  the  product  liability  problem  to  assert  that  "the 
cause"  lies  in  conduct  unrelated  to  their  own  group. 

It  is  the  view  of  the  Task  Force  that  the  product  liability 
problem  is  based  on  a  confluence  of  causes  and  that  it  will  only 
be  resolved  if  each  cause  is  properly  addressed. 


xxxix 


For  the  convenience  of  the  reader,  we  have  summarized  each 
cause  and  then  remedies  that  may  resolve  it. 

Analysis 
(See  pp.  1-21  -  31) 

Cause  1:   Liability  Insurance  Ratemaking  Procedures 

In  the  overwhelming  majority  of  cases,  insurance  company 
sources  did  not  rely  on  data  to  support  premium  increases  that 
occurred  in  the  197^-1976  period. 

Nevertheless,  a  number  of  representatives  from  the  insurance 
industry  have  stated  that  product  liability  rates  were  set  too 
low  in  the  1971-1974  period.  Insurers  argue  that  in  the  early 
1970 's  they  were  not  aware  that  product  liability  would  become  a 
substantial  problem.  The  Task  Force's  Legal  Study  showed  that 
strict  product  liability  first  came  into  the  law  as  an  important 
force  in  1965.  By  1971  and  1972,  a  number  of  major  states  had 
adopted  strict  product  liability  theories.  Nevertheless,  this 
did  not  alter  the  product  liability  insurer  practice  of  combining 
product  liability  coverages  in  Comprehensive  General  Liability 
packages.  This  factor,  along  with  uncertainties  in  insurer 
reserving  practices,  makes  it  almost  impossible  to  obtain  an 
accurate  profit  and  loss  picture  for  product  liability  insurance. 
Thus,  we  have  been  unable  to  make  a  finding  as  to  whether  product 
liability  premium  increases  were,  as  a  whole,  justified  in  the 
197^-1975  period.  Circumstantial  evidence  suggests  that  some 
insurers  engaged  in  "panic  pricing."  It  would  appear  that  some 
insureds  may  be  paying  a  higher  premium  than  data  would  justify, 
and  others  may  be  paying  a  lower  premium.  A  full  discussion  of 
this  cause  will  be  found  at  p.  1-21.  Chapter  V  describes,  in 
detail,  the  pricing  process,  claims  experience,  and  the  financial 
situation  in  the  insurance  industry. 

Remed  ies  that  improve  ratemaking  procedures 

Premium,  loss  and  claim  data  should  be  collected  in  a  manner 
that  is  as  statistically  sound  and  reliable  as  possible  for 
ratemaking  and  other  purposes. 


xl 


An  improved  data  base  is  an  essential  first  step  in  the 
solution  of  product  liability  problems--it  will  permit 
examination  of  actual  trends  in  product  liability  claims 
and  costs  to  insurers. 


Product  liability  insurance  rates  and  premiums 
more  closely  related  to  statistical  asses 
product  risks.  Rates  for  most  product 
insurance  risks  are  based  on  subjective  estim 
anticipated  loss  costs.  Consequently,  i 
possible  to  draw  direct  correlations  between 
and  product  risks.  Nevertheless,  it  may  be  di 
collect  sufficient  data  for  ratemaking  purpose 
product  classes.  To  overcome  this 
consideration  should  be  given  to  expanding  tho 
classes  where  experience  is  generated  slowly. 


should  be 

sments   of 

1 iabil ity 

ations   of 

t   is   not 

premiums 
fficult  to 
s  for  some 

problem , 
se  product 


3.  Product  liability  insurance  rates  and  premiums  should  be 
monitored  to  ensure  that  they  are  fair,  non- 
discriminatory and  reasonably  related  to  product  risk. 
In  the  area  of  product  liability  insurance, 
consideration  should  be  given  to  targeting  review  of 
those  rate  increases  which  exceed  a  threshold  amount. 
Such  a  procedure  would  focus  regulatory  attention  on 
those  rates  and  premiums  which  have  the  most  significant 
adverse  effect  on  business.  Such  monitoring,  would  also 
promote  greater  uniformity  among  rates  charged  to  firms 
producing  products  with  similar  risks. 

In  order  to  achieve  this  goal,  it  is  essential  that 
state  insurance  regulators  have  access  to  a  data  base 
which  includes  nationwide  experience  on  all  product 
liability  claims. 

4.  There  is  a  need  to  promote  greater  financial  disclosure 
and  accountability  in  product  liability  insurance.  It 
would  be  constructive  if  a  system  were  devised  whereby 
insurers  would  report  all  product  liability  experience 
as  a  separate  line  on  their  annual  report  filed  with 
state  insurance  departments.  This  would  permit 
examination  of  aggregate  product  liability  experience  of 
insurers.   Also,  it  would   appear   to   be   both   in   the 


xli 


insurers'  and  the  public  interest  for  insurers  to 
provide  information  that  would  enable  regulators  and 
others  to  get  a  more  accurate  assessment  of  the 
insurers'  complete  financial  situation  regarding  claims 
and  reserves. 

5.  It  may  be  necessary  to  conduct  further  studies  on 
reserving  practices,  including  evaluation  of  methods  of 
estimating  reserves,  the  disposition  of  the  excess  of 
reserves  that  are  not  ultimately  paid  to  claimants  and 
related  claim  expenditures,  and  the  appropriateness  of 
existing  loss  development  and  trend  factors. 

The  basis  for  these  conclusions  and  details  of  insurer- 
related  remedial  proposals  are  set  forth  in  Chapter  V  of 
this  report. 

Cause  2:   Manufacturing  Practices 

The  data  suggest  that  more  manufacturers  are  giving  greater 
attention  to  product  liability  loss  prevention  techniques. 
Nevertheless,  some  companies--especially  some  smaller  ones--are 
unable  to  devote  adequate  resources  to  product  liability  loss 
prevention  programs  and  do  not  receive  assistance  from  their 
insurance  companies  in  regard  to  this  problem.  In  the  long  run, 
this  leads  to  product  liability  claims,  greater  insurance  and 
other  costs  for  the  manufacturer  and  the  product  user.  Details 
with  respect  to  this  cause  are  set  forth  at  pp.  1-24  -  26. 

Remedies  that  address  unsafe  manufacturing  practices 

1.  Any  government  pooling  or  reinsurance  mechanism  which 
allows  a  subsidy  to  individual  insureds  should  include  a 
provision  that  will  provide  product  users  with  the 
assurance  that  the  program's  participants  utilized 
reasonable  product  liability  loss  prevention  techniques. 
See  p.  VII-175. 

2.  Those  charged  with  the  responsibility  of  approving 
insurance  rates  should  give  careful  consideration  to 
developing  a  technique  whereby  insurers  would  build  into 
product   liability   insurance   rates   an    appropriate 


xlii 


discount   when   insureds   used   proper  product  liability 
prevention  techniques.   See  p.  VII-177. 

3.  While  insurers  are  in  an  excellent  position  to  assist 
individual  insureds  in  implementing  sound  product 
liability  loss  prevention  programs,  there  are  serious 
problems  with  making  a  requirement  of  this  type 
mandatory.  If  this  approach  were  taken,  an  appropriate 
surcharge  might  be  added  to  product  liability  insurance 
which  would  allow  a  mandate  of  this  type  to  be 
implemented.   See  p.  VII-180. 

4.  Under  existing  legislation,  it  would  be  possible  to  ask 
an  appropriate  Federal  agency  to  coordinate  product 
liability  risk  information  for  a  variety  of  agencies  and 
make  it  available  to  manufacturers  that  could  benefit 
from  it.  See  p.  VII-183.  It  is  less  certain  that 
government  personnel  should  engage  in  providing  direct 
technical  assistance  to  manufacturers  in  the  area  of 
product  liability  loss  prevention  techniques.  See  pp. 
VlI-185  -  186. 

Cause  3:   Uncertainties  in  the  Tort-Litigation  System 

The  tort-litigation  system  does  not,  in  general,  impose 
absolute  liability  on  manufacturers  of  products.  In  many 
situations,  a  jury  is  asked  to  balance  the  economic  burden  on  the 
manufacturer  to  produce  a  safe  product  against  the  probability 
that  the  product  may  cause  injuries  and  the  severity  of  those 
injuries.  On  the  other  hand,  some  appellate  courts  do  not  view 
product  liability  law  as  a  means  of  apportioning  responsibility 
between  parties,  but  as  a  compensation  system.  Some  decisions 
from  these  courts  come  very  close  to  holding  that  the  tort- 
litigation  system  should  provide  a  recovery  when  persons  are 
injured  by  products. 

While  these  cases  appear  to  be  relatively  few  in  number, 
insurers  have  regarded  them  as  quite  important  in  their  pricing 
practices.  If  one  state  court  reaches  a  decision  of  this  type, 
others  could  follow  it  in  the  future.  It  is  almost  impossible  to 
predict  when  courts  will  change  product  liability  rules  and 
broaden  the  exposure  of  insureds.    The   instability   in   product 


xliii 


liability  law  appears  to  have  increased  defense  and  investigation 
costs  . 

A  detailed  discussion  of  how  product  liability  law  rules  vary 
(in  five  important  areas)  is  set  forth  at  pp.  11-1  -  43. 

Remedies   That   May   Relieve  Uncertainties  in  the  Tort-Litigation 
System 

Introduction 

Individual  state  modifications  of  the  tort  system  may  not 
alleviate  the  uncertainty  problem.  This  is  because  most  products 
are  distributed  in  a  large  number  of  jurisdictions.  Thus, 
product  liability  insurance  rates  are  made  on  a  nationwide,  not 
on  a  local  basis.  Where  product  liability  insurance  costs  are 
passed  on  in  the  price  of  a  product,  consumers  in  some 
jurisdictions  may  pay  for  legal  interpretations  that  are  rendered 
in  others.  Among  the  primary  areas  of  uncertainty  in  basic 
product  liability  law  are  rules  relating  to  the  responsibility  of 
the  manufacturer  in  designing  its  product  and  warning  about 
hazards  connected  with  that  product.   See  pp.  11-1  -  2?..  1-24. 

We  have  concluded  that  this  cause  of  the  product  liability 
problem  can  only  be  addressed  by  a  careful  review  of  product 
liability  law  as  a  whole.  In  Chapter  VII,  this  report  addresses 
a  wide  variety  of  these  topics  and  suggests  ways  in  which  this 
cause  of  the  product  liability  problem  might  be  reduced  or 
eliminated.  Basic  considerations  that  were  utilized  in 
evaluating  the  remedies  are  set  forth  at  p.  VII-2  et.  seq . 
Chapter  VII  itself  is  summarized  at  p.  VII-242  et^  seq .  of  this 
report . 

The  Task  Force  did  not  decide  whether  uniform  rules  should  be 
formulated  at  the  Federal  or  state  level;  rather,  it  has  left 
that  issue  for  policymakers  to  determine  in  light  of  this  report 
as  well  as  other  information  that  is  available  on  the  topic  of 
product  liability. 

While  uniform  product  liability  rules  should  be  developed,  it 
also  will  be  useful  to  engage  in  the  further  study  of  the  utility 
of  a  no-fault  compensation  system.  While  this  report  does  not 
resolve  the  ultimate  issue  of  whether  no-fault  should   or   should 


xliv 


not  be  used  in  the  area  of  product  liability,  it  defines  the 
issues  that  must  be  resolved  before  a  decision  of  that  kind  can 
be  made.  While  the  Task  Force  has  not  determined  whether  this 
study  should  be  undertaken  at  the  Federal  or  state  level,  it 
suggests  that  duplicative  study  costs  be  avoided. 

Major  issues  which  must  be  resolved  in  the 
development  of  uniform  product  liability  rules 

1 .  The  Basic  Standard  of  Responsibility 

The  basic  standard  of  responsibility  for  product 
liability  should  separately  identify  problems  relating 
to  defects  in  construction  from  defects  in  design  and 
defects  based  on  a  failure  to  warn.  Our  discussion  of 
the  details  of  this  issue  are  set  forth  at  pp.  VII-15  - 
18  of  this  report. 

2.  Modification  of  Rules  Relating  to  the  Age  of  Products 

There  is  some  merit  in  the  suggestion  that  the  tort- 
litigation  system  should  set  forth  a  period  of  time 
where  a  manufacturer's  duty  to  product  users  terminates. 
On  the  other  hand,  fixed  statutes  of  repose  can  work  an 
unfair  hardship  on  injured  parties.  This  report 
attempts  to  balance  the  interests  of  consumers  and 
manufacturers  in  this  difficult  area.  The  details  of 
our  conclusions  are  set  forth  on  pp.  VII-  18  -  28. 

3.  A  Duty  Limitation  for  Unavoidably  Unsafe  Products 

Some  products  are  unavoidably  unsafe  in  their  normal 
use.  While  this  report  suggests  that  manufacturers 
should  not  be  deemed  liable  for  injuries  caused  by 
unavoidably  unsafe  products,  shielding  the  manufacturer 
may  leave  a  seriously  injured  consumer  without 
compensation.  Also,  the  current  approach  to  the  topic 
subjects  manufacturers  to  considerable  defense  costs. 
Long-term  resolutions  in  this  topic  area  seem 
particularly  suited  to  more  major  modifications  in  tort 
law.   See  pp.  VII-29  -  32. 


xlv 


4.    The   Development   of   Predictable   Legal   Standards   for 
Product  Liabil ity  Cases 


a. 


State-of-the-art  defense 


It  would  be  inadvisable  for  product  liability  law 
to  adopt  a  state-of-the-art  defense  based  on 
standards  customarily  used  in  an  industry.  On  the 
other  hand,  courts  that  deem  the  technological 
state-of-the-art  totally  irrelevant  fuel  the 
uncertainty  in  product  liability  law.  This  report 
suggests  an  approach  that  would 
manufacturers  without  permitting  them 
product  standards  used  in  litigation. 
33  -  37. 


be   fair   to 

to   control 

See  pp.  VII- 


b.    Compliance   with 
standards  defense 


legislative   or   administrative 


There  might  be  some  incentive  towards  risk 
prevention  if  a  manufacturer  were  given  a  tort  law 
benefit  on  the  basis  of  its  compliance  with 
appropriate  legislative  or  administrative 
standards.  Nevertheless,  a  loose  application  of 
that  benefit  might  produce  the  opposite  result. 
This  report  suggests  a  method  whereby  certain 
standards  would  be  deemed  to  create  a  rebuttable 
presumption  that  a  product  conforming  to  it  was 
reasonably  safe  in  regard  to  that  specific 
standard.   See  pp.  VII-37  -  42. 

Regulation  of  expert  testimony 

Courts  might  make  wider  use  of  court-appointed  experts  under 
a  procedure  similar  to  that  outlined  in  Federal  Rule  706.  When 
experts  are  utilized,  the  court  might  hold  a  preliminary  hearing 
to  test  the  qualifications  of  experts  under  a  procedure  outlined 
in  this  report  at  pp.  VII-42  -46.  Arbitration  may  present  the 
best  method  for  regulating  expert  testimony.  See  pp.  VII-229  -  - 
239. 


xlvi 


Modification  of  rules  relating  to  conduct  on 
the  part  of  product  users 

In  some  situations,  it  may  be  appropriate  for  courts  to 
impose  a  duty  on  manufacturers  to  warn  about  potential  misuses  of 
a  product.  While  it  is  just  to  permit  manufacturers  to  know  the 
exact  nature  and  extent  of  this  duty,  there  does  not  appear  to  be 
a  readily  available  neutral  source  that  could  formulate  that 
responsibility.  The  report  shows  how  a  comparative 
responsibility  system  might  balance  the  interests  of  both 
consumers  and  manufacturers  in  cases  of  product  misuse.  See  pp. 
VII-46  -  55. 

Proposed  modifications  of  some  basic  product  liability 
rules  that  relate  to  damages 

Modification  of  rules  relating  to  damages  have  the  potential 
of  providing  rationality  and  stability  in  the  tort-litigation 
system.   See  pp.  VII-56  -  84. 

a.    Attorneys'  Fees 

Defense  costs,  rather  than  the  contingent  fee,  have 
directly  affected  the  cost  of  product  liability 
insurance.  Remedies  that  foster  settlement  and  decrease 
the  need  for  litigation  reduce  this  cost.  See  p.  VII- 
62. 

The  contingent  fee,  on  occasion,  may  tempt  an  attorney 
to  bring  a  frivolous  suit.  To  alleviate  this  problem, 
it  may  be  more  appropriate  to  penalize  those  specific 
attorneys  by  imposing  sanctions  against  them,  than  it  is 
to  abolish  the  contingent  fee  system.  See  p.  VII-62. 
The  greatest  potential  abuse  in  the  contingent  fee 
system  appears  to  arise  in  some  high  verdict  cases.  A 
sliding  scale  contingent  fee  system  may  correct  this 
abuse,  but  it  must  have  plasticity  to  account  for  cases 
where  attorneys  are  deserving  of  a  fee  that  is  above  the 
scale.   See  pp.  VII-59  -  62. 


xlvii 


b.  Regulation  of  Damage  Awards  for  Pain  and  Suffering 

Value  judgments  abound  in  regard  to  the  question  of 
whether  common  law  rules  for  damages  for  pain  and 
suffering  should  be  changed.  See  pp.  VII-64  -  69.  This 
report  suggests  that  approaches  that  limit  (rather  than 
eliminate)  damages  for  pain  and  suffering  have  the 
greatest  potential  for  balancing  the  variety  of 
considerations  that  must  be  evaluated  in  formulating 
such  a  change.  If  the  change  were  applied  in  product 
liability  alone,  it  should  be  specially  justified. 

c.  Modifications  of  the  Collateral  Source  Rule 

Proposals  to  modify  the  collateral  source  rule 
potentially  affect  all  of  tort  law.  The  area  of  product 
liability  is  one  in  which  a  selective  abolition  of  the 
collateral  source  rule  might  be  justified.  This  should 
occur  where  product  liability  law  is  not  based  on  fault, 
but  on  principles  of  "risk  distribution"  or  an 
"enterprise  theory  of  liability."  Very  careful 
consideration  should  be  given  to  the  scope  of  any 
modification  of  this  rule.   See  pp.  VlI-70  -  75. 

d.  Restrictions  on  Awarding  Punitive  Damages 

A  procedure  that  may  mitigate  unfairness  regarding 
punitive  damages  in  the  area  of  product  liability  is  to 
have  the  judge  rather  than  the  jury  determine  the  amount 
of  punitive  damages.  In  making  this  determination,  the 
judge  could  consider,  among  other  factors,  the  amount  of 
punitive  damages  the  defendant  has  already  paid.  The 
jury  would  still  determine  whether  the  damages  should  be 
awarded.   For  details  see  pp.  VIl-75  -  80. 

e.  Replacing   Lump   Sum   Damages   with   a   Periodic  Payment 
System 

It  would  be  useful  to  obtain  more  precise  information  as 
to  whether  the  potential  savings  connected  with  a 
periodic  payment  system  would  be  cancelled  out  by 
administrative   costs   connected   with   monitoring    or 


xlviii 


modifying  the  basic  fund.  This  system  could  be  more 
easily  utilized  if  it  were  adopted  with  arbitration  or  a 
no-fault  compensation  system.   See  VII-80  -  84. 

Major  Issues  Involving  Third-Party 
Claims  and  Workplace  Injuries 

Introduction 

According  to  the  recent  Insurance  Services  Office  Closed 
Claim  Survey,  workers  injured  on  the  job  are  involved  in  11 
percent  of  product  liability  incidents  resulting  in  claim 
payment.  However,  these  incidents  account  for  42  percent  of 
total  bodily  injury  payments.  Because  many  workplace  injury 
claims  were  preceded  by  Worker  Compensation  payments  to  an 
injured  party,  these  claims  are  particularly  susceptible  to 
duplication  of  effort  and  transaction  costs.  The  Task  Force 
considered  a  number  of  remedies  that  involved  the  potential 
shifting  of  costs  among  manufacturers,  employers  and  employees. 
Some  of  the  considerations  in  this  area  overlap  with  problems 
relating  to  cost  shifting  among  multiple  parties.  In  general, 
the  report  notes  that  the  principle  of  contribution  among 
defendants  based  on  the  relative  responsibility  of  each  may  be  a 
useful  one.  It  may  be  inapplicable  in  certain  situations.  See 
pp.  VII-85  -  87. 

Contribution  and  Indemnity  as  Applied  to 
Injuries  in  the  Workplace 

An  important  remedial  proposal  that  has  the  potential  of 
reducing  product  liability  premium  costs  for  manufacturers  of 
industrial  equipment  is  to  allow  them  contribution  claims  against 
negligent  employers  where  their  negligence  contributed  to  an 
employee's  product-related  workplace  accident.  While  this  remedy 
also  has  the  potential  of  reducing  the  number  of  product-related 
workplace  accidents,  a  negative  aspect  of  it  is  that  it  would 
increase  transaction  costs.  The  remedy  is  a  complicated  one  with 
a  number  of  alternative  approaches  and  implications.  The  reader 
is  directed  to  pp.  VII-89  -  95  for  detailed  information  on  the 
subj  ec t . 


xlvix 


Prohibition  or  Modification  of  Subrogation  By  Worker  Compensation 

Carriers 

It  would  appear  reasonable  to  reduce  subrogation  claims  by 
the  amount  an  employer  was  at  fault  in  causing  an  injury  to  a 
worker.  For  a  discussion  of  the  variety  of  considerations 
involved  with  regard  to  the  benefits  and  shortcomings  of  this 
remedy  and  how  it  might  be  implemented,  the  reader  is  directed  to 
p.  VII-95  -  99. 

Validation  of  Hold  Harmless  Agreements 

It  might  be  appropriate  to  legislatively  validate  hold 
harmless  clauses  where  the  buyer  of  the  product  requested  that  it 
be  delivered  without  safety  features,  altered  it  or  failed  to 
maintain  it  properly.  On  the  other  hand,  hold  harmless  clauses 
can  be  abused  and  rules  regarding  them  should  take  this  factor 
into  account. 

Assuming  both  parties  who  sign  the  clause  are  insured, 
legislative  validation  of  hold  harmless  clauses  will  have  little 
effect  on  product  liability  rates  unless  insurer  procedures  take 
the  existence  of  hold  harmless  clauses  into  account.  For  details 
about  the  benefits  and  shortcomings  of  proposals  connected  with 
hold  harmless  clauses,  see  pp.  VII-99  -  IO3. 

Worker  Compensation  As  A  Sole  Source  Of  Recovery — 
Abolishing  the  Worker's  Third-Party  Claim 

The  cost  effectiveness  and  potential  impact  of  Worker 
Compensation  as  a  sole  source  for  product  liability  recovery  have 
made  it  an  attractive  one  for  those  considering  product  liability 
reform.  It  would  appear  that  it  should  be  considered  along  with 
more  general  Worker  Compensation  legislative  reform.  In  that 
context,  estimates  can  be  made  about  the  overall  cost  of  this 
proposal . 


If  this  reform  is  implemented,  the  worker  must  receive  an 
appropriate  benefit  for  foregoing  his  third-party  claim.  Also, 
the  manufacturer  of  a  defective  product  should  contribute  to  the 
worker's  award.  A  procedure  for  accomplishing  this  goal  is  post- 
accident   arbitration.    Very   careful   thought   must  be  given  to 


developing  the  details  of  that  procedure.  This  overall  remedy  is 
a  complex  one  with  many  competing  considerations,  and  the  reader 
is  directed  to  pp.  VII-103  -  112  for  a  discussion  of  the  subject. 

Alternative  Methods  for  Compensating  Consumer  Product 
Injuries :   No-Fault  Compensation  Systems  and  Arbitration 

No-Fault  Compensation  Systems 

Unless  the  tort-litigation  system  can  be  stabilized, 
pressures  toward  developing  a  no-fault  compensation  system  in  the 
area  of  product  liability  will  continue.  These  pressures  may 
accelerate  if  Worker  Compensation  is  made  an  exclusive  remedy  for 
product-related  injuries  that  occur  in  the  workplace. 
Nevertheless,  pure  or  modified  no-fault  plans  do  not  represent  an 
immediate  solution  to  the  product  liability  problem,  and  these 
pressures  may  be  directed  toward  a  practical  impossibility.  On 
the  one  hand,  modified  no-fault  plans  do  not  appear  to  be 
responsive  to  those  pressures  because  they  leave  too  much  to 
chance.  On  the  other  hand,  it  is  uncertain  whether  a  practical 
pure  no-fault  first-party  system  can  be  developed  --  a  system 
both  large  and  small  private  insurers  would  be  willing  to 
underwrite  and  service  at  insurance  rates  that  would  be  available 
and  affordable  for  large  and  small  businesses. 

It  would  be  useful  to  conduct  additional  research  to 
determine  whether  a  practical  working  model  could  be  developed 
that  would : 


(1) 
(2) 


(3) 


(4) 


Resolve  problems  related  to  coverage. 

Resolve   problems   of  causation  and  other  individualized 

issues  that  have  a  special  importance   in   the   area   of 

product  liability. 

Resolve   whether   a  practical  product  liability  no-fault 

system  could  be  formulated   that   did   not   require   the 

formation  of  an  independent  government  agency. 

Resolve  how  the  system  could  place  proper  incentives  for 

risk   prevention   on    manufacturers    whose    defective 

products  caused  injury. 


li 


No-fault  systems  in  product  liability  present  a  very  complex 
topic.  For  a  discussion  of  the  topic  and  an  explanation  of  these 
specific    issues,    see    pp.    VII-202    -   239. 

Arbitration 

Arbitration  of  product  liability  is  a  remedy  worth  further 
consideration.  Of  the  variety  of  forms  of  arbitration, 
preliminary  indications  suggest  that  compulsory  non-binding 
arbitration  is  the  most  appropriate  for  product  liability  cases. 
Preliminary  indications  also  suggest  that  product  liability 
arbitration  is  likely  to  bring  an  overall  reduction  of  insurance 
costs  only  if  larger  as  well  as  small  claims  are  included  within 
its  scope  of  coverage. 

Difficult  value  judgments  arise  in  this  area  because  a 
fundamental  of  American  jurisprudence,  the  jury,  is  being 
supplanted  by  a  smaller  and  more  specialized  group.  At  this 
time,  there  is  no  conclusive  proof  that  the  process  would  be  more 
predictable,  reduce  costs,  or  expedite  the  judicial  process. 
Nevertheless,  our  analysis  indicates  that  a  properly  constructed 
arbitration  program  has  an  excellent  potential  for  achieving 
these  goals.   See  pp.  VII-229  -  239. 

NON  CAUSE-RELATED  REMEDIAL  PROPOSALS 

MODIFICATION  OF  PRODUCT  LIABILITY  INSURANCE  MECHANISMS 

Introduction 

It  has  been  alleged  that  certain  modifications  of  product 
liability  insurance  mechanisms  will  allow  the  tort-litigation 
system  to  function  reasonably  well  and  eliminate  or  modify  the 
need  to  enact  tort  law  modifications  that  would  reduce  the 
liability  exposure  of  defendants.  These  mechanisms  do  not  always 
deliver  what  they  promise,  and  the  reader  is  directed  to  our 
detailed  discussion  of  this  entire  subject  beginning  at  p.  VII- 
115. 


lii 


Residual 
Level? 


Insurance   Market  Mechanisms  --  At  The  State  or  Federal 


While  it  might  be  worthwhile  to  have  a  variety  of  product 
liability  residual  insurance  market  mechanisms  explored  at  the 
state  level  where  their  viability  could  be  tested  (the  need  for 
such  mechanisms  may  also  vary  in  different  states),  the  Task 
Force's  contractor  reports  strongly  suggested  that  the  very 
nature  of  product  liability  insurance  indicates  that  these 
mechanisms  must  be  implemented  at  the  Federal  level.  This 
decision,  while  rooted  in  practicality,  has  very  serious  policy 
implications  and  the  reader  is  directed  to  p.  VII-115  -  118  for  a 
detailed  consideration  of  this  issue. 

Residual   Insurance  Market  Mechanisms  --  Under  What  Circumstances 
Should  They  Be  Subsidized? 


As  a  short-range  remedy,  residual  product  iiab 
market  mechanisms  might  have  to  be  subsidized  if  t 
any  substantial  effect  on  product  liability  insur 
is  important  to  limit  subsidization  to  insur 
unavailability  or  major  unaf fordabil ity  problems, 
program  may  establish  a  precedent  for  provid 
assistance  to  anyone  who  suffers  from  high  insur 
it  is  necessary  to  subsidize  residual  prod 
mechanisms,  it  would  seem  preferable  to  use  publ 
than  compel  stronger  liability  lines  to  support  we 


ility  insurance 
hey  are  to  have 
ance  rates.  It 
eds  who  face 
Otherwise,  the 
ing  government 
ance  costs.  If 
uct  liability 
ic  funds  rather 
aker  ones. 


Our  discussion  about  the  details  and  the  circumstances  as  to 
whether  a  subsidy  is  justified  is  set  forth  at  p.  VII-119. 

Assigned  Risk  Plans 

The  fact  that  classic  assigned  risk  plans  do  not  include 
loss-pooling  mechanisms,  plus  problems  relating  to  eligibility  of 
insureds  and  allocations  of  assignments  to  insurers,  seriously 
compromise  the  potential  value  of  this  remedy  in  the  area  of 
product  liability.   See  pp.  VII-127  -  130. 


liii 


Pooling  Mechanisms 

It  is  worthwhile  to  explore  whether  a  voluntary  pooling 
mechanism  would  be  practicable  before  utilizing  any  mandatory 
pooling  system.  Private  insurers  should  give  further 
consideration  to  the  formation  of  voluntary  pools,  and 
appropriate  government  agencies  might  consider  developing 
guidelines  to  assist  in  that  process.  Our  discussion  outlines 
some  of  the  major  issues  that  persons  forming  a  mandatory  product 
liability  pool  must  resolve.  The  lack  of  specific  data  about  the 
effectiveness  of  such  a  device  in  the  area  of  product  liability 
made  a  complete  evaluation  of  this  remedy  difficult.  The  topic 
of  pooling  is  a  very  complex  one,  and  the  reader  should  consult 
pp.  VII-132  -  142. 

Federal  Insurance  and  Reinsurance 

It  would  be  better  to  attack  the  causes  of  the  overall 
product  liability  problem  than  to  establish  a  program  where  the 
Federal  government  markets  and  sets  rates  in  the  area  of  product 
liability  insurance.  See  p.  VII-143.  The  product  liability 
problem  is  a  fluid  one,  and  the  need  for  such  a  program  could 
arise  in  the  future. 

The  National  Swine  Flu  Immunization  program  does  not  appear 
to  be  an  apt  analogy  for  industries  suffering  particularly  severe 
insurance  af fordab il ity  problems.  Federal  reinsurance  is 
preferable  to  direct  Federal  insurance  --  reinsurance  would 
involve  less  government  activity  in  an  area  currently  being 
handled  by  the  private  insurance  industry.  Since  Federal  funds 
would  have  to  be  used  to  subsidize  this  mechanism  (or  at  least  be 
put  at  risk),  strong  policy  reasons  would  have  to  support  the 
implementation  of  such  a  program.  See  p.  VII-II9.  The  issues  of 
Federal  insurance  and  reinsurance  are  extremely  complex,  and  the 
reader  is  directed  to  p.  VII-143  -  153. 

Captive  Insurance  Companies 

Captive  insurance  companies  provide  a  potential  means  of 
relieving  availability  and  af fordab il ity  problems  for  some 
product  liability  insureds.  A  basic  unanswered  question  is 
whether  the   device   can   be   utilized   by   businesses   that   are 


liv 


suffering  these  difficulties.  The  answer  to  this  question 
depends,  in  part,  on  trade  associations'  willingness  and  ability 
to  develop  captives  that  would  meet  basic  insurance  regulatory 
requirements.  Charter  requirements  could  be  drafted  that  would 
encourage  the  formation  of  adequately  capitalized  small  business 
requirements  regarding  Federal  income  tax  deductions  for  parent 
corporations  that  utilize  captive  insurance  companies.  Details 
on  this  complex  subject  appear  at  p.  VII-15^  -  167. 

Structured  Self-Insurance  Programs 

Tax  incentives  that  encourage  the  development  of  structured 
self-insurance  programs  may  benefit  small  businesses  which  have 
insufficient  capital  to  form  captive  insurance  companies.  Self- 
insurance  programs  also  may  encourage  product  liability  loss 
prevention,  increase  the  capacity  of  the  insurance  industry  to 
provide  product  liability  coverage,  and  prevent  situations  from 
arising  where  a  viable  product  liability  claim  against  an 
uninsured  small  business  cannot  be  enforced.  On  the  other  hand, 
the  mechanics  of  the  remedy  must  be  carefully  designed  in  order 
that  it  will  not  be  subject  to  abuse.  It  may  be  appropriate  for 
the  Department  of  the  Treasury  to  undertake  a  full  tax  evaluation 
of  alternative  forms  for  this  particular  remedy.  Details  about 
this  remedy  appear  at  p.  VII-167. 

Remedies  Designed  to  Eliminate  Unsatisfied  Judgments 

Our  data  do  not  show  that  product  liability  judgments  are 
highly  likely  to  go  unsatisfied.  Therefore,  neither  mandatory 
product  liability  laws  nor  unsatisfied  judgment  funds  may  be 
necessary  at  this  time.   See  p.  VII-172  -  187. 

If  there  were  relatively  few  cases  where  judgments  against 
product  manufacturers  were  defaulted,  an  unsatisfied  judgment 
fund  would  be  preferable  to  a  mandatory  product  liability 
insurance  law.  If  the  problem  of  default  judgments  in  the 
product  liability  area  became  more  widespread,  mandatory  product 
liability  insurance  would  have  to  be  given  greater  consideration. 
From  the  point  of  view  of  the  consumer,  it  is  unreasonable  to 
permit  a  manufacturer  to  sell  products  when  he  is  unable  to 
respond  in  damages  if  those  products  prove  defective  and  injure 
product  users.   For  a  discussion  of  the  problems  relating  to  both 


Iv 


unsatisfied    judgment   funds   and   mandatory   product   liability 

insurance,  see  pp.  VII-175  _  igY. 


Ivi 


Chapter  I 

The  Nature  of  this  Report 

and  the  Causes  of  the 
Product  Liability  Problem 


THE  NATURE  OF  THIS  REPORT  AND  THE  CAUSES 
OF  THE  PRODUCT  LIABILITY  PROBLEM 


INTRODUCTION 

This  report  is  the  culmination  of  over  one  year  of  intensive 
study  about  the  topic  of  product  liability.  It  describes  the 
causes,  nature  and  scope  of  problems  that  have  arisen  in  that 
field.  Also,  it  analyzes  potential  cures  or  remedies  that  have 
been  proposed  as  solutions  for  those  problems.  It  is  for  the  use 
of  the  Administration,  Federal  and  state  legislators,  as  well  as 
consumer,  insurer  and  business  groups  who  are  interested  in  the 
topic  of  product  liability. 

The  topic  of  product  liability  deals  with  the  full  scope  of 
how  our  legal  and  private  insurance  systems  compensate  persons 
who  are  injured  by  products.  It  defines  the  responsibility  of 
retailers,  distributors  and  manufacturers  for  products  that  cause 
injury. 

In  1975,  an  apparent  problem  (some  sources  said  "crisis") 
arose  in  the  field  of  product  liability.  A  number  of 
manufacturers  and  business  periodicals  alleged  that  product 
liability  insurance  had  become  unavailable  or  unaf fordable .  The 
consequences  of  this  situation  included  the  possibilities  that 
businesses  might  terminate  because  they  were  unable  to  get 
coverage;  that  injured  persons  would  be  unable  to  enforce  product 
liability  judgments;  and  that  manufacturers  would  be  hesitant  to 
produce  some  products  that  would  be  useful  in  our  society.  It 
was  also  alleged  that  the  system  of  private  insurance  in  the 
field  of  product  liability  was  breaking  down.  Finally,  it  was 
alleged  that  relatively  few  injured  persons  benefited  from  the 
system . 

As  will  be  detailed  in  the  succeeding  pages  of  this  chapter, 
in  April  1976  a  Federal  Interagency  Task  Force  was  established  by 
the  Economic  Policy  Board  of  the  White  House  to  study  the  product 
liability  problem  and  report  back  to  it  on  or  before  December  15, 
1976.    A   report   based   on  that  document,  entitled  "The  Federal 


1-1 


Interagency  Task  Force  on  Product  Liability  Briefing  Report,"  was 
released  to  the  public  on  January  4,  1977. 

The  Briefing  Report  was  a  highly  condensed  "still  picture"  of 
the  product  liability  problem  as  it  existed  in  December,  1976. 
It  was  based  on  preliminary  drafts  of  three  independent 
contractor  studies  commissioned  by  the  Task  Force  as  well  as  pre- 
December  1,  1976  data  and  information.  The  independent 
contractor  reports  were  in  the  legal,  insurance  and  industry 
areas.  Since  the  distribution  of  the  Briefing  Report,  the  Task 
Force  staff  has  edited  the  final  versions  of  the  contractor 
reports.  The  reports  have  been  published  and  are  described  at  p. 
1-12.  We  have  found  that  an  overall  impression  of  this  initial 
report  about  product  liability  law  was  a  correct  one--product 
liability  problems  present  a  potential  disruptive  effect  on  the 
economy.  More  importantly,  the  problem  is  not  amenable  to  simple 
remedies.  It  is  a  subtle  problem  in  which  the  interests  of 
consumers,  workers,  manufacturers,  distributors,  retailers  and 
insurers  have  to  be  balanced. 

This  report  is  based  on  the  final  versions  of  the  contractor 
reports  and  the  wide  array  of  resources  set  forth  later  on 
in  this  chapter.  While  we  believe  it  is  the  most  thorough  study 
of  the  topic  of  product  liability  that  has  been  published  in  the 
United  States,  we  would  note  that  it  does  not  purport  to  answer 
all  questions  relating  to  the  product  liability  problem.  It  does 
reach  some  important  conclusions  about  the  subject  and  shows 
lines  of  study  which  are  necessary  to  resolve  additional  matters. 
As  the  report  will  show,  firm  conclusions  about  the  product 
liability  problem  are  difficult  to  reach  because  data  on  some 
major  questions  are  limited  or  unavailable.  Nevertheless,  our 
overall  approach  has  been  to  reach  conclusions  where  possible;  we 
appreciate  the  observation  that  there  is  always  "room  for  more 
study"  about  any  topic.  The  product  liability  problem  can  be 
alleviated  in  the  immediate  future,  although  the  more  promising 
solutions  will  take  time  to  shape  and  implement. 

It  is  our  hope  that  this  report  and  our  three  independent 
contractor  reports  will  be  of  assistance  to  the  Administration 
and  legislators,  as  well  as  to  consumer,  insurer  and  business 
groups  and  to  others  who  are  interested  in  a  balanced   and   sound 


1-2 


resolution   of   problems  that  have  arisen  in  the  field  of  product 
1 iabil ity . 

THE  BASIS  FOR  A  FEDERAL  STUDY  ON  PRODUCT  LIABILITY 

We  have  received  a  number  of  inquiries  as  to  why  the  Federal 
government  has  studied  the  product  liability  problem.  The 
questioners  point  out  that  product  liability  has  generally  been  a 
topic  of  state  law  and  that  related  insurance  mechanisms  are  also 
regulated  by  the  states.  The  Federal  government's  interest  in 
the  product  liability  problem  arose  in  the  fall  of  1975.  The 
United  States  Small  Business  Administration  published  a  report 
entitled,  "Product  Liability:  Its  Implications  for  Small 
Business."  Around  that  time  a  number  of  manufacturers  and  trade 
associations  formed  product  liability  committees.  By  January  of 
1976  a  good  number  of  businesses--especially  in  the  capital  goods 
area--wrote  the  Administration  and  Congress  that  a  "crisis"  had 
arisen  in  the  area  of  product  liability.  They  stated  that  the 
cost  of  product  liability  insurance  had  increased  at  an 
extraordinary  rate  in  the  197^  to  1976  years,  and  that  the  number 
and  size  of  claims  had  also  increased  at  unprecedented  rates. 
The  Office  of  Chief  Counsel  for  Advocacy  in  the  Small  Business 
Administration  received  reports  from  small  manufacturers 
indicating  that  product  liability  insurance  costs  had  become  a 
significant  force  that  was  jeopardizing  small  businesses.  By  the 
spring  of  1976,  some  retail  and  distributor  groups  had  also 
brought  to  the  attention  of  the  Federal  government  the  fact  that 
product  liability  was  a  serious  problem  for  American  business. 

In  this  early  period  some  extraordinary  assertions  were  made 
that  we  have  been  unable  to  validate.  For  example,  some  insurers 
predicted  that  one  million  product  liability  claims  would  be 
filed  in  1976.  The  insurance  industry's  own  best  estimate  today 
is  70,000  .  Many  letters  told  about  cases  where  it  seems 
transparently  unfair  for  the  plaintiff  to  recover  damages.  We 
have  found  that  these  so-called  "horror  stories"  do  not  represent 
the  standard  of  the  day,  but  they  do  occur  on  occasion.  These 
cases  have  helped  generate  a  "crisis"  atmosphere--our  report  will 
detail  why. 

These  early  "calls  for  help"  from  the  Federal  government  were 
sometimes  accompanied  by  proposed  solutions  or  "remedies."    Most 


1-3 


of   these   remedies   focused   on   the  tort-litigation  system  and 

called  for  rules  that  would   curtail  the   number   of   successful 

product    liability    claims    that  could   be   brought   against 
manufacturers . 

The  initial  Federal  government  response  to  these  "calls  for 
help"  was  to  have  the  Department  of  Commerce  undertake  a  brief 
study  of  the  product  liability  problem.  In  March  of  1976,  the 
Department  issued  a  report  entitled  "Product  Liability  Insurance: 
Assessment  of  Related  Problems  and  Issues"  (Bureau  of  Domestic 
Commerce,  1976).  That  report  suggested  that  there  might  be  a 
widespread  problem  with  regard  to  both  availability  and 
af fordabil ity  of  product  liability  insurance.  It  also  indicated 
that  product  liability  might  be  placing  a  great  financial  strain 
on  the  insurance  industry.  The  report  emphasized  that  its 
tentative  conclusions  had  to  be  qualified  and  requalified  as  more 
data  (or  lack  of  data)  came  to  the  government's  attention. 

This  initial  report  prompted  the  Administration  to  form  an 
Interagency  Task  Force  to  study  the  product  liability  problem  in 
more  depth.  The  Task  Force  began  its  work  in  the  late  spring  of 
1976  and  was  asked  to  report  to  the  Economic  Policy  Board  (EPB) 
by  December  15,  1976.  The  Task  Force  completed  that  mission  and 
a  Briefing  Report  (which  was  derived  from  the  report  to  the  EPB) 
was  released  for  the  public's  use  and  information  on  January  ^, 
1977.  The  Briefing  Report  set  forth  the  Task  Force's  tentative 
conclusions  about  the  product  liability  problem  . 

A  decision  was  made  to  edit  and  publish  the  three  independent 
contractor  reports  that  had  served  as  predicates  for  the  Briefing 
Report.  The  basis  of  that  decision  was  to  avoid  duplicative  and 
time-consuming  work  on  the  part  of  legislators,  state  commissions 
and  private  organizations.  It  was  also  decided  to  publish  a 
Final  Report  that  would  synthesize  and  evaluate  the  contractor 
reports  as  well  as  other  information  that  came  to  the  attention 
of  the  Task  Force  and  its  staff. 


1-4 


THE  FEDERAL  INTERAGENCY  TASK  FORCE  ON  PRODUCT  LIABILITY- 
ITS  RESEARCH  AND  OPERATIONS 

The  Task  Force 

The  Federal  Interagency  Task  Force  on  Product  Liability  was 
chaired  by  the  Under  Secretary  of  Commerce.  In  its  initial  work 
through  the  publication  of  its  Briefing  Report,  the  chairman  was 
Edward  0.  Vetter .  The  present  Under  Secretary  of  Commerce, 
Sidney  Harman,  guided  the  Task  Force  through  the  publication  of 
its  independent  contractor  reports  and  this  Final  Report.  Policy 
guidance  of  Task  Force  operations  at  the  Department  of  Commerce 
was  also  provided  by  the  present  General  Counsel,  Mr.  C.L. 
Haslam,  Deputy  General  Counsel  Mr.  Homer  E.  Moyer,  Jr.,  and 
former  General  Counsel,  Mr.  J.T.  Smith.  Other  members  of  the 
Task  Force  included  the  Departments  of  Health,  Education  and 
Welfare;  Housing  and  Urban  Development;  Labor;  Transportation; 
Treasury;  the  Council  of  Economic  Advisors;  the  Office  of 
Management  and  Budget;  and  the  Small  Business  Administration. 
The  Consumer  Product  Safety  Commission,  which  was  not  a  member  of 
the  Task  Force,  provided  advice  and  assistance.  The  Department 
of  Justice,  a  member  of  the  Task  Force  in  its  initial  stages, 
provided  assistance  in  response  to  specific  inquiries. 

The  Working  Task  Force 

Each  Task  Force  member  appointed  one  or  more  persons  to  a 
Working  Task  Force  group.  That  group  met  every  ten  days  in  the 
first  six  months  of  the  study  and  then  continued  to  review  work 
products  as  they  were  developed.  Professor  Victor  E.  Schwartz  of 
the  University  of  Cincinnati  College  of  Law,  co-author  of  the 
most  widely  used  torts  casebook  in  the  United  States,  served  as 
chairman  of  the  Working  Task  Force  and  provided  overall  direction 
of  the  substantive  content  of  the  study. 

The  Staff 

Staff  effort  for  the  project  was  carried  on  primarily  by 
persons  working  for  the  Department  of  Commerce.  Responsibility 
with  regard  to  the  preparation  of  this  report  and  designing  and 
editing  the   underlying   contractor   reports   was   undertaken   by 


1-5 


numerous   individuals   at   the   Department  of  Commerce.   They  are 
acknowledged  at  p.  vi  of  this  report. 

The  staff  benefited  from  the  expertise  and  assistance  of  Mr. 
Howard  Clark,  Special  Assistant  to  the  Administrator  of  the 
Federal  Insurance  Administration  of  the  Department  of  Housing  and 

Urban  Development. 

The  Task  Force's  General  Guidelines 
on  the  Scope  of  the  Study 

In  May,  1976,  the  Task  Force  decided  that  its  study  should 
concentrate  on  product  liability  problems  in  nine  specific 
product  lines  divided  relatively  evenly  between  workplace  and 
consumer  products.  The  reason  for  this  was  twofold.  First,  in 
light  of  the  time  and  resources  allocated  for  the  study,  it  would 
not  be  practical  to  study  all  kinds  of  products.  Second,  it  was 
the  Task  Force's  judgment  that  it  would  be  sound  to  consider 
product  lines  that  had  the  potential  for  causing  serious  injury. 
Also,  manufacturers  of  most  of  the  products  selected  appeared  (on 
the  basis  of  anecdotal  data)  to  have  product  liability  insurance 
problems.  It  was  thought  that  through  this  approach,  the  Task 
Force  would  be  able  to  gauge  the  full  impact  of  the  problem. 

Information  about  other  products  did  come  to  the  attention  of 
the  Task  Force  staff.  Where  the  information  was  useful  it  was 
utilized  in  this  report.  See,  e.g..  Chapter  V,  Table  V-6 .  The 
products  studied  were: 

Products  with  workplace  impact: 

1.  Industrial  machinery:  metal  cutting,  metal  forming, 
wood-working  and  textile  machinery; 

2.  Industrial  grinding  wheels; 

3.  Ferrous  and  non-ferrous  metal  castings,  primarily  those 
used  as  components  of  capital  equipment;  and 

4.  Industrial  chemicals,  including  both  organic  and 
inorganic  substances,  used  in  products  and  in  the 
production  process. 


1-6 


Products  with  consumer  impact: 

1.  Aircraft  components; 

2.  Automotive  components  related  to  safe  vehicle  operation, 
including  their  manufacture  and  distribution,  but  not 
their  installation  and  repair; 

3.  Medical    devices; 

4.  Pharmaceuticals;    and 

5.  Power    lawnmowers. 

The  Task  Force  also  determined  that  the  study  should 
concentrate  on  traumatic  injury  and  not  occupational  disease. 
The  latter  topic  was  deemed  part  of  general  studies  on  Worker 
Compensation  .  Also,  time  considerations  made  this  decision 
necessary . 

GENERAL  SOURCES  OF  INFORMATION  FOR  THE  STUDY 

Interagency  Commentary 

In  order  to  provide  an  ongoing  focal  point  for  the  study, 
Professor  Schwartz  developed  a  working  paper  on  remedial 
approaches  to  product  liability.  The  first  draft  of  that  paper 
was  distributed  to  the  Task  Force  in  July  of  1976.  Subsequent 
revised  versions  of  the  working  paper  were  distributed,  and 
comments  from  the  various  agencies  were  synthesized  and 
incorporated  where  possible.  As  information  from  the  independent 
contractors  and  other  sources  (set  forth  below)  came  to  the 
attention  of  the  Task  Force,  that  original  working  paper  evolved 
into  Chapter  VII  of  this  report.  That  chapter  was  then 
circulated  to  the  agencies  for  comments  and  suggestions. 

Agency  commentary  was  sought  with  regard  to  each  of  the  other 
chapters  of  this  report.  Interagency  review  was  of  substantial 
benefit  in  ensuring  both  the  objectivity  and  accuracy  of  the 
content  of  the  report. 


1-7 


Product  Liability  Symposium 

In  order  to  generate  new  ideas  and  perspectives  about  the 
product  liability  problem,  a  symposium  was  held  by  the  Working 
Task  Force  in  July  of  1976  .  The  speakers  at  the  symposium 
included  the  Reporter  of  the  Restatement  (Second)  of  Torts ,  an 
author  of  one  of  the  leading  casebooks  and  treatises  on  the  topic 
of  product  liability,  an  acknowledged  academic  expert  on  the 
topic  of  insurance,  a  leading  expert  on  no-fault  compensation 
systems,  experienced  plaintiff  and  defense  attorneys,  and 
professors  of  engineering  and  economics.  These  individuals  are 
acknowledged  at  p.  ix. 

Notice  in  the  Federal  Register 

In  order  to  acquaint  all  persons  who  might  be  interested  in 
our  study,  a  notice  entitled  "Scope  of  Research  Being  Conducted 
on  Product  Liability"  was  published  in  the  Federal  Register  on 
Monday,  September  20,  1976,  41  Fed.  Reg.  40529  (1976).  The 
notice  described  the  nature  and  scope  of  the  study  undertaken  by 
the  Task  Force  and  sought  relevant  information  from  interested 
parties.  It  resulted  in  several  hundred  letters  reaching  the 
Task  Force.  Some  of  these  letters  provided  information  about 
remedial  proposals  and  were  utilized  in  Chapter  VII.  Others 
provided  information  about  cost  and  availability  of  insurance. 
These  letters  were  of  assistance  in  our  preparation  of  Chapter  VI 
in  our  specific  discussion  of  insurance  availability  and 
af fordabil ity . 

Product  Liability  Advisory  Committee  to  the 
Under  Secretary  of  Commerce 

The  Under  Secretary  of  Commerce  formed  a  special  Advisory 
Committee  on  Product  Liability.  Under  law,  the  Advisory 
Committee  was  solely  responsible  to  the  Under  Secretary;  however, 
he  shared  the  information  provided  by  the  Advisory  Committee  with 
the  Task  Force  and  also  coordinated  the  Task  Force's  study 
efforts  with  this  committee.  While  the  committee  members 
provided  helpful  information  and  insights  about  the  product 
liability  problem,  it  was  not  chartered  to  and  did  not  approve  or 
disapprove  of  this  report. 


1-8 


The  committee  (chaired  by  the  Honorable  Ned  Price,  Member, 
State  Board  of  Insurance  of  the  State  of  Texas,  initially 
consisted  of  19  members  from  small  and  large  manufacturers, 
distributors,  retailers,  insurers,  consumers,  labor,  and  attorney 
groups.  Seven  additional  persons  were  added  in  January  1977, 
including  a  representative  of  the  service  industries.  The  names 
and  affiliations  of  the  Advisory  Committee  are  set  forth  at 
p.  viii  of  this  report. 

The  Advisory  Committee  met  four  times  during  the  course  of 
our  study  .  The  initial  meeting  was  held  on  September  20,  1976. 
The  purpose  of  that  meeting  was  to  gather  the  perspectives  of  the 
various  interest  groups  about  the  product  liability  problem.  The 
purpose  of  that  meeting  was  to  obtain  the  members'  reactions  to 
approximately  30  remedial  proposals  that  had  been  brought  to  the 
attention  of  the  Task  Force.  The  third  meeting  was  held  on 
January  11,  1977.  The  purpose  of  that  meeting  was  to  gather  the 
committee's  reactions  to  the  Briefing  Report  that  had  been 
published  by  the  Task  Force  on  January  4th.  The  fourth  meeting 
of  the  Advisory  Committee  was  held  on  June  27,  1977.  The  purpose 
of  that  meeting  was  to  evaluate  the  Task  Force's  three 
independent  contractor  reports  in  the  insurance,  industry  and 
legal  fields.  Specific  questions  were  directed  to  the  committee 
about  shortcomings  in  the  reports.  The  committee  members'  views 
were  also  sought  as  to  whether  the  product  liability  problem  had 
changed  since  1976. 

Information  from  Industry  Associations 
and  Interest  Groups 

A  considerable  amount  of  information  and  opinions  about 
product  liability  was  supplied  to  the  Task  Force  by  organizations 
that  had  an  interest  in  the  outcome  of  the  study.  Some  of  these 
organizations  were:  the  Insurance  Services  Office;  the  American 
Insurance  Association;  the  Alliance  of  American  Insurers;  the 
Property-Casualty  Insurance  Council;  the  National  Association  of 
Independent  Insurers;  the  Defense  Research  Institute;  the 
Association  of  Trial  Lawyers  of  America;  the  Risk  and  Insurance 
Management  Society;  the  American  National  Standards  Institute; 
the  Independent  Insurance  Agents  of  America;  the  National 
Association  of  Mutual  Insurance  Agents;  the  National  Federation 
of   Independent   Businesses;   the   National    Product    Liability 


1-9 


Council;  the  National  Association  of  Wholesaler-Distributors;  the 
Machinery  and  Allied  Products  Institute;  the  National  Product 
Liability  Council;  the  National  Association  of  Insurance  Brokers; 
the  National  Machine  Tool  Builders  Association;  and  numerous 
other  industry  associations. 

The  National  Association  of  Insurance  Commissioners  (through 
its  representative  to  the  Under  Secretary's  Advisory  Committee, 
Judge  Ned  Price)  gave  its  cooperation  to  the  Task  Force  effort. 
Also,  the  National  Conference  of  State  Legislatures  (through  its 
Director  of  Social  Services  Project,  Deborah  Bennington)  was  of 
special  assistance  to  the  Task  Force  staff  in  alerting  it  to 
product  liability  legislative  developments  at  the  state  level. 

Information  Regarding  Consumer  Perspectives 
on  the  Product  Liability  Problem 

The  Task  Force  was  very  interested  in  obtaining  the  consumer 
perspective  about  the  nature  of  and  solutions  to  the  product 
liability  problem;  this  was  essential  if  our  study  was  to  achieve 
the  goals  of  being  both  objective  and  balanced. 

We  have  identified  two  principal  interests  of  the  consumer  in 
the  product  liability  problem.  First,  the  consumer  has  an 
interest  in  obtaining  reasonable  compensation  when  he  or  she  is 
injured  by  an  unreasonably  unsafe  product.  Second,  the  consumer 
has  an  interest  in  ensuring  that  the  total  cost  of  product 
liability  does  not  create  an  irrational  increase  in  the  price  of 
products.  See  Letter  to  the  Task  Force  Project  Director  from 
Mrs.  Esther  Peterson,  Special  Assistant  to  the  President  for 
Consumer  Affairs  (5/3/77). 

The  Task  Force  and  its  staff  were  able  to  obtain  some  helpful 
insights  into  the  consumer  perspective  from  the  consumer 
representatives  on  the  Advisory  Committee  to  the  Under  Secretary 
of  Commerce. 

Other  helpful  information  on  the  consumer's  perspective 
included  the  statement  Ms.  Anita  Johnson,  of  the  Public  Citizen's 
Health  Research  Group,  presented  at  the  fourth  meeting  of  the 
Advisory  Committee  to  the  Under  Secretary  of  Commerce  as  well  as 
the   statement   Ms.  Johnson  presented  before  the  Senate  Committee 


1-10 


on  Commerce,  Science  and  Transportation  on  April  29,  1977;  the 
statement  of  Ms.  Kathleen  O'Reilly,  Executive  Director  of  the 
Consumer  Federation  of  America,  presented  to  that  same  committee 
on  April  27,  1977;  the  statements  of  Mr.  Ralph  Nader,  delivered 
to  the  Senate  Select  Committee  on  Small  Business  on  December  8, 
1976  and  to  the  First  World  Congress  on  Product  Liability  on 
January  21,  1977.  The  First  World  Congress  on  Product  Liability 
also  produced  a  helpful  consumer  analysis  undertaken  by  Ms. 
Benedicte  Federspiel,  Director  of  the  Legal  and  Economic  Division 
of  the  Danish  Consumer  Council.  See  Transcript,  First  World 
Congress  on  Product  Liability,  p.  331  (1977). 

In   its   analysis   of   product  liability  remedies,  our  legal 

contractor  was  directed  to  consider  each  from  the  perspective   of 

the  injured  consumer.  The  same  pattern  has  been  followed  in 
Chapter  VII  of  this  report. 

Hearings  Undertaken  by  Congress 

Hearings  undertaken  by  Congress  were  an  excellent  source  to 
test  data  and  other  information  gathered  by  the  Task  Force.  Task 
Force  staff  members  attended  these  hearings  and  the  statements 
submitted  were  given  careful  review.  The  Task  Force  expresses 
its  appreciation  to  the  chairmen,  members  and  staff  of  those 
committees  for  their  cooperation  with  our  project. 

Among  the  materials  considered  were  those  developed  at: 
Hearings  conducted  by  the  Senate  Select  Committee  on  Small 
Business  on  September  8,  10,  October  20,  December  8,  1976  and 
March  9,  10,  and  April  26,  1977  (Senator  Gaylord  Nelson, 
Chairman);  Hearings  held  before  the  Consumer  Subcommittee  of  the 
Senate  Committee  on  Commerce,  Science  and  transportation,  April 
27,  28  and  29,  1977  (Senator  Wendell  Ford,  Chairman);  and 
Hearings  held  by  the  House  Subcommittee  on  Capital,  Investment 
and  Business  Opportunities  of  the  Committee  on  Small  Business  on 
April  n,  6,  18,  June  6,  28,  29,  July  16,  18  and  19,  1977 
(Representative  John  LaFalce,  Chairman). 

The  Task  Force's  Independent  Contractor  Reports 

While  this  report  made  extensive  use  of  the  materials 
discussed  thus   far,   its   principal   resources   were   the   three 


1-1  1 


independent  contractor  studies  commissioned  by  the  Task  Force.  A 
brief  description  of  those  reports  and  their  underlying  data 
bases  follows . 

The  Legal  Study 

Description  of  the  study 


The   Task   Force's  Legal  Study  was  undertaken  by  The  Research 

Group,  Inc.   It  has   been   published   in   seven   volumes  and   is 

available    from    the   National   Technical   Information  Service 

("NTIS") 


f 


The  purpose  of  the  Legal  Study  was  to  provide  an  accurate 
picture  of  current  product  liability  law  doctrine  in  the  United 
States,  indicate  data  available  in  the  legal  system  about  product 
liability,  develop  an  independent  survey  of  appellate  cases  in 
the  area  of  product  liability,  and  analyze  approximately  30 
remedial  approaches  that  had  been  proposed  as  potential 
improvements  in  the  area  of  product  liability.  In  evaluating 
remedies  the  contractor  was  to  consider  both  economic  and 
engineering  perspectives.  The  principal  sources  of  information 
utilized  by  the  Legal  Study  were: 

1.  Data  relating  to  product  liability  cases  filed  in  the 
United  States  District  Courts  from  197^  through  1976. 
These  are  the  only  years  this  type  of  information  was 
accumulated.  The  results  of  this  information  are  set 
forth  in  Chapter  II. 

2.  Data  relating  to  product  liability  cases  filed  in  the 
State  of  Connecticut  from  1974  to  1976.  Our  Legal  Study 
found  that  Connecticut  was  the  only  state  that  assembled 
that  information.  The  results  are  set  forth  in  Chapter 
II. 

3.  The  Cook  County  Illinois  Jury  Verdict  Survey  of  product 
liability  cases  decided  from  1970  to  1975.  The  results 
of  this  survey  are  set  forth  in  Chapter  II. 

4.  A  survey  of  655  reported  product  liability  appellate 
cases   in   eight   representative   states.    The    states 


1-12 


included  Arizona,  California,  Illinois,  New  Jersey,  New  York, 
Pennsylvania,  Texas  and  Wisconsin.  The  results  of  that  survey 
are  set  forth  in  Chapter  II. 

5.  A  review  of  all  significant  legal  literature  on  the 
topic  of  product  liability  published  from  1970  to  1976. 
The  results  of  this  review  are  reflected  in  Chapter  VII. 

Limitations  on  the  Legal  Study 

The  data  accumulated  by  the  Legal  Study  are  somewhat  limited 
in  their  value.  The  original  data  collected  are  based  on 
appellate  cases.  It  should  be  noted  that  appellate  cases 
represent  a  very  small  percentage  of  the  actual  cases  filed. 
Appellate  decisions  are  usually  the  more  important  product 
liability  cases  where  complex  legal  issues  must  be  resolved. 
Nevertheless,  at  our  Working  Task  Force  Symposium, 
representatives  of  both  the  plaintiff's  and  defendant's  bar 
suggested  that  appellate  cases  in  the  area  of  product  liability 
law  tend  to  be  more  representative  of  cases  as  a  whole  than  is 
the  situation  in  other  areas  of  tort  law,  e.g.,  automobile 
negligence  cases. 

The  Legal  Study  did  not,  and  was  not  requested  to,  survey  all 
product  liability  cases  at  the  trial  level.  This  would  be  an 
almost  impossible  undertaking.  In  most  courthouses,  cases  are 
not  categorized  under  the  topic  of  product  liability.  This  means 
that  all  cases  filed  would  have  to  be  surveyed  in  order  to 
determine  what  occurred  in  the  narrow  area  of  product  liability. 
The  cost  of  such  an  undertaking  would  be  prohibitive. 

In  its  remedy  discussion,  the  Legal  Study  did  not  totally 
synthesize  its  economic  and  engineering  analysis  with  its  legal 
analysis--its  analysis  of  remedies  was  undertaken  under  a  very 
short  time  frame.  Nevertheless,  commentary  on  the  report 
reaching  the  Task  Force  staff  suggests  that  it  is  the  most 
complete  analysis  of  product  liability  remedies  that  has  been 
published  prior  to  the  issuance  of  this  report. 


1-13 


Insurance  Study 

Description  of  the  study 

Our  Insurance  Study  was  undertaken  by  McKinsey,  Co.  It  has 
been  published  in  one  volume  and  is  available  from  NTIS  .  The 
Insurance  Study  describes  how  product  liability  insurance  is 
currently  provided  and  how  insurers  develop  product  liability 
underwriting  rates.  The  report  assesses  the  response  of  existing 
residual  insurance  mechanisms  (reinsurance,  surplus  lines 
insurance  and  self-insurance)  to  the  product  liability  problem. 
Finally,  it  provides  the  perspective  of  insurers  on  proposed 
remedies  for  the  product  liability  problem. 

Our  Insurance  Study  based  its  conclusions  on: 

1.  Personal  interviews  with  1^1  members  of  the  insurance 
community  who  are  involved  in  handling  product  liability 
insurance  brokerage  ratemaking  and  underwriting. 

2.  A  review  of  approximately  3,000  underwriting  files  on 
product  liability  cases  in  six  insurance  companies--our 
insurance  contractor  reported  that  these  companies  are 
among  the  largest  writers  of  this  class  of  business. 

3.  A  survey  of  large--over  $  1 00 , 000--claims  closed  in  1975, 
conducted  by  the  American  Mutual  Insurance  Alliance. 

4.  Seventeen  industry  association  surveys  that  were 
supplied  to  the  insurance  contractor  by  the  industry 
contractor  . 

Limitations  on  the  Insurance  Study 

In  general,  the  Insurance  Study  relied  on  information 
supplied  to  it  by  the  insurance  industry.  It  did  not  make  a 
detailed  independent  analysis  of  the  profit  and  loss  situation  in 
that  industry.  Its  review  of  3,000  underwriting  files  provided 
firsthand  information  about  ratemaking  practices;  nevertheless, 
in  some  respects,  the  sample  may  not  have  been  representative  of 
the  entire  industry.  The  Insurance  Study  only  provided  a  limited 
analysis  of  claims  experience.   This  was  based  principally   on   a 


l-^n 


limited  closed  claim  survey  of  79  $100,000+  claims.  The 
insurance  contractor  was  not  instructed  to  undertake  a  closed 
claim  survey  because  one  had  been  undertaken  by  the  Insurance 
Services  Office.  The  results  of  that  study  were  not  available  to 
the  contractor  in  time  to  incorporate  in  its  study. 

The  Insurance  Study's  estimate  of  how  the  product  liability 
premium  dollar  is  allocated  by  insurers  may  be  misleading:  where 
the  report  speaks  of  dollars  "paid  to  claimants,"  it  is  actually 
referring  to  dollars  insurers  expect  to  pay  to  claimants.  See 
Insurance  Study  at  2-4.  The  importance  of  this  distinction  is 
developed  in  Chapter  V  of  this  report. 

The  insurance  contractor's  evaluation  of  remedies  is  derived 
from  insurer  perspectives.  As  a  reading  of  the  report  will 
reflect,  those  sources  do  not  always  agree  on  the  utility  of 
particular  remedies. 

Industry  Study 

Description  of  the  study 

The   Industry  Study  was  undertaken  by  Gordon  Associates,  Inc. 

It  has  been  published   in   two   volumes   and   is   available   from 

10 
NTIS. 

The  industrial  contractor  surveyed  the  claims  experience  of 
small,  medium,  and  large  corporations  in  the  nine  product  lines 
selected  by  the  Task  Force  for  study.  It  also  analyzed  industry 
association  surveys  that  had  been  undertaken  by  organizations 
cooperating  with  our  study.  Finally,  the  report  was  to  consider 
remedial  proposals  that  could  be  generated  by  industry  itself, 
the  most  important  of  which  was  product  liability  prevention. 

The  Industry  Study  based  its  conclusions  on: 

1.  An  independent  telephone  survey  of  337  firms  in  the 
product  lines  selected  by  the  Task  Force.  The  firms 
were  evenly  distributed  among  small,  medium  and  large 
corporations . 


1-15 


2.  An  analysis  of  the  results  of  product  liability  surveys 
conducted  by  17  national  industry  associations. 

3.  Interviews  with  executives  in  20  firms  in  high-risk 
product  categories.  The  contractor  selected  these 
persons  as  a  result  of  its  consultations  with  industry 
association  personnel  in  our  target  industries. 

M.  A  review  of  accident  statistics  from  state  Worker 
Compensation  bureaus  and  the  Consumer  Product  Safety 
Commission . 

Limitations  on  the  Industry  Study 

It  should  be  noted  that  while  the  industrial  contractor's 
original  data  collection  is  described  herein  as  a  "telephone 
survey,"  the  participants  were  notified  a  reasonable  period  ahead 
of  the  time  that  actual  responses  were  obtained.  The 
participants  were  given  a  detailed  questionnaire  so  that  they 
would  be  aware  of  the  information  that  would  be  sought  by 
telephone . 

This  method  was  selected  because  it  was  thought  that  a  higher 
response  rate  was  possible  than  might  be  obtained  in  a  mail 
survey;  also,  personnel  from  the  contracting  firm  were  able  to 
assist  respondents  with  definitional  problems. 

It  should  also  be  noted,  however,  that  the  telephone  survey 
was  not  designed  on  the  basis  of  psephological  methods.  The 
Office  of  Management  and  Budget  indicated  that  the  information 
collected  would  not  necessarily  "be  representative  of  either  the 
product  liability  experience  of  an  industry  as  a  whole  or  the 
product  liability  experience  related  to  particular  industrial  or 
consumer  products."  Nevertheless,  the  members  of  the  Product 
Liability  Advisory  Committee  to  the  Under  Secretary  of  Commerce, 
who  represent  some  of  the  industries  most  severely  affected  by 
product  liability,  generally  agreed  that  the  findings  of  the 
Industry  Report  were  accurate  with  respect  to  the  product  lines 
surveyed.  The  findings  were  also  supported  by  independent 
industry  association  surveys. 


1-16 


Although  the  industry  association  surveys  contributed  to  the 
analysis,  it  should  be  noted  that  they  differed  in  their  methods 
of  calculation,  analytical  approach  and  rigor.  Response  rates 
were  quite  low  in  the  majority  of  the  stud ies--less  than  20 
percent  in  most  cases.  While  it  might  be  assumed  that  only  those 
with  the  more  serious  product  liability  problems  responded,  it 
has  been  suggested  to  the  Task  Force  that  some  companies  are 
reluctant  to  disclose  information  of  this  type  because  it  may  be 
utilized  against  them  for  competitive  or  litigation  purposes. 
The  industry  association  surveys  relied  on  voluntary  responses, 
and  sometimes  returns  were  incomplete.  One  of  the  more 
comprehensive  surveys  was  undertaken  by  the  Machinery  and  Allied 
Products  Institute  .  It  had  the  best  response  rate,  210 
responses  from  the  480  solicited.  Twenty  industry  association 
surveys  (three  more  than  were  utilized  in  the  Industry  Report) 
are  reviewed  in  this  report  in  Chapter  III. 

The  Industry  Report's  interviews  with  20  firms  involved  firms 
which  were  experiencing  more  serious  product  liability  problems; 
therefore,  they  do  not  necessarily  represent  nationwide  product 
liability  experience.  Nevertheless,  the  interviews  provided  some 
information  that  might  not  be  obtainable  by  surveys. 

The  data  reviewed  by  the  industrial  contractor  from  Federal 
accident  reporting  systems  and  state  reporting  systems  did  not 
focus  specifically  on  product  liability.  For  the  most  part,  it 
was  information  that  flowed  from  Worker  Compensation  systems. 
The  purpose  of  the  data  collection  was  to  provide  some  overall 
focus  on  accident  experience. 

Although  the  original  study  plan  called  for  the  industrial 
contractor  to  study  remedies  that  could  be  implemented  by 
industry  alone,  the  contractor  focused  on  proposed  solutions 
which  had  been  emphasized  by  persons  interviewed  in  the  course  of 
the  contractor's  study  and  which  might  be  implemented  in  a 
relatively  short  period  of  time. 

The  industry  contractor  collected  a  very  large  amount  of  data 
in  a  relatively  short  period  of  time.  The  data  were  reviewed  for 
consistency  and  accuracy  by  the  Office  of  Business  and 
Legislative  Issues  at  the  Department  of  Commerce. 


1-17 


AN  OVERVIEW  OF  THE  CONTENTS  OF  THIS  REPORT 

This  chapter,  Chapter  I,  sets  forth  an  introduction  to  the 
work  of  the  Task  Force  and  also  discusses  (in  the  next  section) 
the  basic  causes  of  the  product  liability  problem. 

Chapter  II,  entitled  "Product  Liability:  A  Legal  Framework," 
is  derived  from  our  Legal  Study.  It  presents  an  overview  of 
product  liability  law  and  focuses  on  five  major  issues  that  have 
been  of  major  importance  in  the  development  of  that  law.  The 
chapter  also  reviews  the  product  liability  data  presently 
available  from  the  legal  system  and  sets  forth  the  results  of  the 
independent  survey  of  product  liability  appellate  cases 
undertaken  by  our  legal  contractor.  The  chapter  provides  a 
picture  of  the  present  rules  of  law  that  have  been,  in  part,  a 
cause  of  the  product  liability  problem. 


Chapter   III,   entitled   "The   Impact  of  Product 
Selected  Industries,"  is  derived  from   our   Industry 
industry   association   surveys.    It   shows  the  impac 
liability  on  the  target  industries  selected  by  the  Ta 
synthesis  of  its  findings  is  presented  in  the  beginni 
a  more  detailed  discussion  of  the  results  follows, 
discussion   of   the   differences   between   what   was 
telephone  survey  and  the  industry  association  surveys 
by  outside  groups.   Three  additional  industry  associa 
that  were  not  available  to  the  industrial  contractor 
in  Chapter  III  . 


Liability  on 
Report  and 
t  of  product 
sk  Force.  A 
ng,  and  then 
There  is  a 
shown  by  our 
undertaken 
tion  surveys 
are  analyzed 


Chapter  IV,  entitled  "Product  Liability  Prevention 
Techniques,"  shows  what  we  have  learned  about  the  implementation 
of  product  liability  prevention  techniques  by  manufacturers  in 
our  target  industries.  It  also  discusses  the  steps  taken  by 
insurers  toward  assisting  insureds  with  the  development  of 
product  liability  prevention  programs.  Finally,  the  chapter 
provides  some  analysis  of  how  product  liability  prevention 
programs  might  be  used  in  the  future. 

It  should  be  noted  that  the  impact  of  the  tort  system  on 
product  liability  prevention  is  discussed  in  Chapter  VI  and  that 
potential    legal    remedies    dealing    with   product   liability 


1-18 


prevention  are  set  forth 
report . 


m 


Chapter   VII,   Section   V   of   this 


Chapter  V,  entitled  "Product  Liability  Insurance,"  discusses 
the  role  product  liability  insurers  have  played  in  resolving  or 
causing  the  product  liability  problem.  It  explains  the  nature 
and  scope  of  the  product  liability  insurance  policy.  It 
describes  the  product  liability  insurance  underwriting  process 
and  ratemaking  procedures.  The  chapter  also  analyzes  the  recent 
profit  and  loss  situation  in  the  property  and  casualty  insurance 
industry.  It  discusses  how  insurance  market  mechanisms  such  as 
reinsurance  and  excess  lines  insurance  are  alleviating  the 
product  liability  problem.  Finally,  it  sets  forth  conclusions 
regarding  the  role  of  the  insurance  industry  in  regard  to  the 
product  liability  problem  and  indicates  how  the  situation  might 
be  improved  . 

Chapter  VI,  entitled  "Major  Impacts  of  Product  Liability," 
provides  a  summary  of  our  major  findings:  it  attempts  to 
synthesize  what  our  legal,  insurance  and  industry  data  and  other 
information  show.  The  chapter  summarizes  for  policymakers  both 
the  positive  and  negative  aspects  of  the  current  product 
liability  system.  It  discusses  the  impact  of  product  liability 
on  the  af fordabil ity  and  availability  of  insurance;  persons 
injured  by  products;  Worker  Compensation  systems;  survival  in 
business;  and  product  liability  prevention  techniques. 


Chapter   VII, 
Product   Liability, 
liability  remedies 
Force.    Obviously, 
remedial   approach 
be  exercised  as  to 
chapter   considers 
1 iabil ity   rules  , 
responsibility   of 
proposed  modificati 
relating   to   damag 
alter  the  manner  in 
chapter   considers 
defendant's  right  a 
remedies    relating 


entitled  "Remedial  Approaches  in  the  Field  of 
"  analyzes  the  more  significant  product 
that  were  brought  to  the  attention  of  the  Task 
the  Task  Force  could  not  analyze  every 
brought  to  its  attention;  some  judgment  had  to 
which  were  the   more   important.    First,   the 

proposed  modifications  of  some  basic  product 
for   example,   rules   that    relate    to    the 

a  user  of  a  product.  Second,  it  considers 
ons  of  some  basic  product  liability  rules 
es.    An  example  would  be  proposals  that  would 

which  attorneys  are  compensated.   Third,   the 

proposed  product  liability  rules  relating  to  a 

gainst  third  parties.   This  section  focuses  on 

to    injury    in   the   workplace,   and   the 


1-19 


relationship  between  the  injured  employee,  his  employer,  and  the 
manufacturer  of  the  product  that  injured  the  employee.  Fourth, 
the  chapter  analyzes  proposed  modifications  of  product  liability 
insurance  mechanisms.  Here  assigned  risk  pools,  reinsurance, 
direct  Federal  insurance,  mandatory  and  voluntary  pooling, 
captive  insurance  companies  and  structured  self-insurance 
programs  are  considered.  This  section  also  focuses  on  legal 
means  whereby  insurers  or  the  government  would  be  required  to 
assist  manufacturers  in  the  development  of  product  liability 
prevention  programs.  The  section  also  analyzes  remedies  designed 
to  eliminate  unsatisfied  judgments.  Fifth,  the  chapter  evaluates 
alternative  methods  for  compensating  consumer  product  injuries. 
There  is  a  discussion  of  both  no-fault  compensation  systems  and 
arbitration.  The  major  conclusions  of  the  chapter  are 
synthesized  and  summarized  in  a  final  section. 

Chapter  VII  has  been  placed  at  the  end  of  this  report  because 
it  is  based  on  considerations  in  all  the  prior  chapters. 
Nevertheless,  legislators  or  others  who  are  interested  in  reform 
proposals  and  want  an  immediate  view  of  the  Task  Force's 
suggestions  should  read  the  summary  of  that  chapter  (pp.  VII- 
242)  . 

THE  CAUSES  OF  THE  PRODUCT  LIABILITY  PROBLEM 

Introduction 

The  Task  Force's  Briefing  Report  identified  three  principal 
causes  of  the  product  liability  problem:  liability  insurance 
ratemaking  procedures,  the  tort-litigation  system  and 
manufacturing  practices.  Little  has  changed  in  the  intervening 
months  to  alter  our  perspective  on  this  issue.  Therefore,  our 
discussion  of  the  causes  of  the  product  liability  problem  will 
closely  parallel  the  Briefing  Report.  Nevertheless,  where  new 
information  has  come  to  the  attention  of  the  Task  Force  or  its 
staff,  it  will  be  identified.  More  importantly,  unlike  the 
Briefing  Report,  this  document  will  provide  a  detailed  analysis 
of  remedies  that  purport  to  address  each  of  these  causes. 

We  are  still  unable  to  rank  these  causes  in  a  meaningful 
hierarchical  chain.  Our  data  simply  do  not  permit  a  conclusion 
that   one  cause  is  more  important  than  the  other.   On  this  issue, 


1-20 


we  doubt  whether  data  could  be 
that  goal . 


obtained   that   would   accomplish 


Nevertheless,  we  have  observed  a  tendency  for  each  group  that 
has  a  special  interest  in  the  product  liability  problem  to  assert 
that  "the  cause"  lies  in  conduct  unrelated  to  their  own  group. 
For  example,  most  insurers  contend  that  the  dramatic  increase  in 
product  liability  insurance  premiums  is  caused  by  the  tort- 
litigation  system.  On  the  other  hand,  the  plaintiff's  bar 
asserts  that  the  cause  lies  in  insurer  ratemaking  practices  and 
in  the  failure  of  manufacturers  to  use  proper  product  liability 
prevention  techniques.  Some  manufacturers,  in  turn,  have 
asserted  that  the  problem  has  been  caused  by  an  irresponsible 
plaintiff's  bar:  it  is  alleged  that  plaintiff's  attorneys  bring 
frivolous  claims  and  have  brought  about  a  system  of  tort  law  that 
makes  product  liability  prevention  useless  as  a  means  of  guarding 
against  1 awsui ts . 

It  is  our  view  that  the  product  liability  problem  is  based  on 
a  confluence  of  causes  and  that  it  will  only  be  resolved  if  each 
cause  is  properly  addressed. 

Aside  from  the  three  principal  causes,  there  are  other  causes 
that  may  have  contributed  to  the  problem.  While  we  have 
discussed  those  causes  herein,  they  are  generally  not  matters 
that  can  be  resolved  by  the  remedial  proposals  discussed  in  this 
report,  e.g.,  inflation  and  the  increase  in  number  and  complexity 
of  products. 

Discussion  of  the  Causes 

Cause  ^:  Liabil ity  Insurance  Ratemaking  Procedures 

The  Briefing  Report  identified  liability  insurance  ratemaking 
practices  as  a  cause  of  the  product  liability  problem.  As  our 
data  set  forth  in  Chapters  III,  V  and  VI  show,  there  have  been 
very  substantial  increases  in  product  liability  insurance 
premiums  in  our  target  industries  during  the  years  197^-1976.  We 
have  received  anecdotal  data  that  the  same  has  been  true  for 
certain  industries  that  were  not  included  in  our  study,  e.g.. 
ladder  manufacturers,  manufacturers  of  sporting  goods. 


1-21 


On  the  other  hand,  there  have  been  no  published  data  that 
show  a  similar  nationwide  increase  in  the  average  size  of  the 
verdicts  rendered  against  defendants  in  those  industries.  Our 
data  do  suggest  that  there  has  been  a  substantial  increase  in  the 
number  of  pending  claims,  and  our  legal  contractor  found  on  the 
basis  of  limited  data  collected  in  the  legal  system  that  the 
average  amount  of  product  liability  judgments  did  increase  during 
the  I97O-I975  period.  Nevertheless,  these  increases  did  not 
appear  to  the  contractor  to  be  large  enough  to  support  insurance 
company  premium  increases. 

In  the  overwhelming  majority  of  cases,  insurance  company 
sources  did  not  rely  on  data  (either  in  terms  of  number  or  size 
of  claims)  to  support  premium  increases  that  occurred  in  the 
197^-1976  period.  Thus,  at  congressional  hearings  held  to 
determine  the  role  of  insurer  ratemaking  practices  in  regard  to 
the  product  liability  problem,  James  A.  Kassel,  Vice  President  of 
the  Hartford  Insurance  Group  stated,  "the  paucity  of  information 
we  have  been  able  to  report  to  you  is  an  embarrassment..."  See 
Hearings  before  the  Subcommittee  on  Capital,  Investment  and 
Business  Opportunities,  House  Committee  on  Small  Business,  95th 
Cong.,  1st  Sess.,  Transcript,  p.  372  (June  28,  1977).  Mr.  John 
K.  Dane,  Vice  President  of  Liberty  Mutual  Company,  also  indicated 
that  "a  large  part  of  products  liability  insurance  had  been 
priced  in  such  a  way  that  no  ratemaking  or  claims  data  were 
generated..."  See  Hearings  before  the  Subcommittee  on  Capital, 
Investment  and  Business  Opportunities,  supra  at  p.  431. 

This  testimony  tends  to  confirm  a  finding  of  our  insurance 
contractor:  it  found  that  neither  insurance  company 
representatives  nor  the  Insurance  Services  Office  (the  principal 
ratemaking  organization  for  the  insurance  industry)  have  a 
significant  amount  of  data  on  the  percentage  of  "pure"  product 
liability   experience   losses.    For   the   most    part,    product 

liability   experience,   most   of   which  is  composite-rated,  loss- 

1  2 
rated,  or    large  (a)  rated   ,  has  not  been  separately  recorded. 

Nevertheless,  based  on  the  limited  statistical  information 
that  was  available,  the  insurance  contractor  concluded  that 
insurance  companies  in  the  1971-1974  period  "lost  money"  on 
product  liability  business.  The  insurance  contractor  based  its 
finding   on   a  showing  that  "incurred"  losses    grew  more  rapidly 


1-22 


than  premiums.  As  Chapter  V  explains,  incurred  losses  do  not 
equal  paid  losses;  rather,  that  figure  includes  paid  losses, 
amounts  "reserved"  against  pending  claims  and  also  amounts 
"reserved"  against  incurred  but  not  reported  claims.  As  Chapter 
V  shows,  insurance  industry  regulators  do  not  systematically 
determine  whether  amounts  reserved  in  incurred  loss  figures  in 
the  area  of  product  liability  turn  out  to  be  too  high.  This  can 
occur  not  only  when  the  reserve  estimate  is  too  high,  but  also 
when  the  interest  or  capital  gains  that  may  flow  from  reserves  is 
substantial.   This  topic  is  developed  in  Chapter  V  at  p.  3^. 

A  number  of  representatives  from  the  insurance  industry  have 
said  that  its  product  liability  rates  were  set  too  low  in  the 
1971  through  197^  period.  In  that  regard,  insurance  industry 
spokesmen  have  frequently  observed  that  product  liability 
insurance  was  "practically  given  away"  in  that  period  of  time  as 
part  of  a  larger  insurance  package.  See  Statement  of  James  A. 
Kassel  ,  Hearings  before  the  Subcommittee  on  Capital,  Investment 
and  Business  Opportunites ,  supra  at  371.  Consumer  groups  find 
this  explanation  unsatisfactory.  They  argue  that  insurance 
companies  aggressively  sought  product  liability  business  in  the 
late  1960's  and  early  1970's  in  order  to  generate  income  for 
investment  purposes.  When  the  "bear  market"  struck  in  1973-197^ 
and  the  insurance  industry  took  heavy  losses,  thus  reducing 
policyholder  surplus,  this  (it  is  argued)  caused  a  shortage  in 
underwriting  capacity.  Thus,  stock  market  losses,  together  with 
underwriting  losses,  led  to  the  considerable  increases  in  product 
liability  premiums. 

On  the  other  hand,  insurers  argue  that  in  the  early  1970's, 
they  were  not  aware  that  product  liability  would  become  a 
substantial  problem.  Nevertheless,  our  Legal  Study  shows  that 
strict  product  liability  first  came  into  the  law  as  an  important 
matter  with  the  publication  of  the  Restatement  (Second )  of  Torts 
Section  402  A  in  1965.  By  1971  and  1972,  a  number  of  major 
states  (e.g.  ,  California,  Illinois,  Michigan,  New  Jersey)  had 
adopted  strict  product  liability  theories.  Nevertheless,  this 
did  not  alter  the  product  liability  insurer  practice  of  combining 
product  liability  coverages  in  Comprehensive  General  Liability 
packages.  This  practice,  along  with  uncertainties  in  insurer 
reserving  practices,  makes  it  almost  impossible  to  obtain  an 
accurate  profit  and  loss  picture  for  product  liability  insurance. 


1-23 


As  indicated  in  Chapter  V,  we  have  been  unable  to  make  a  finding 
as  to  whether  product  liability  premium  increases  were,  as  a 
whole,  justified  in  the  197^-1976  period.  Nevertheless,  all  of 
the  evidence  reviewed  by  the  Task  Force  confirms  suspicions  of 
the  director  of  McKinsey,  Co.,  our  insurance  contractor,  that 
some  insurers  engaged  in  "panic  pricing."  See  Hearings  before 
the  Subcommittee  on  Capital  ,  Investment  and  Business 
Opportunities,  supra  at  p.  279  (June  6,  1977).  It  also  confirmed 
his  observation  that  product  liability  rates  are  "effectively 
uncontrolled."  See  Hearings  before  the  Subcommittee  on  Capital, 
Investment  and  Business  Opportunities,  supra  at  p.  286  (June  6, 
1977).  In  spite  of  all  this,  a  number  of  insurer  sources  contend 
that  "notwithstanding  the  shortcomings  of  our  present  data  base, 
for  many  purposes  insurer  pricing  methodologies  and  prices  for 
products  liability  are  by  no  means  invalid,  useless,  or  in  any 
way  lacking  in  integrity....  a  better  data  base  will  result  in 
more  reliable  pricing,  but  the  absence  of  that  base  does  not  mean 
that  our  insurer  pricing  is  wrong."  See  Remarks  of  James  A. 
Kassel  ,  Hearings  before  the  Subcommittee  on  Capital,  Investment 
and  Business  Opportunities  at  p.  372  (June  28,  1977). 

The  absence  of  data  appears  to  make  it  impossible  to  confirm 
whether  insurer  price  increases  in  the  area  of  product  liability 
are  justified.  As  insurers  appreciate,  product  liability 
premiums  cannot  be  utilized  to  recoup  past  losses.  Nevertheless, 
it  would  appear  that  some  insureds  may  be  paying  a  higher  premium 
than  data  would  justify,  and  others  may  be  paying  a  lower 
premium.  The  burden  of  proof  would  appear  to  fall  on  the 
insurers  to  justify  increases  of  200,  300,  or  400%  in  premiums 
where  they  do  not  have  data  based  on  claims  experience  that  would 
suggest  that  increases  of  this  type  are  proper.  Our  conclusions 
as  to  how  product  liability  ratemaking  procedures  might  be 
improved  and  this  cause  of  the  product  liability  problem 
alleviated  appear  in  Chapter  V  at  p.  48. 

Cause  II :   Manufacturing  Practices 

As  the  Briefing  Report  indicated,  a  review  of  655  appellate 
cases  by  our  Legal  Study  produced  some  evidence  that  rart  of  the 
product  liability  problem  stems  from  the  fact  that  some 
manufacturers  are  producing  unreasonably  unsafe  products.  These 
products    are    mismanuf ac tured--they   suffer   from   defects   in 


1-24 


construction.  The  products  are  not  in  accord  with  the 
manufacturer's  own  specifications.  In  that  connection,  our  legal 
contractor  noted  that  in  140  of  the  655  appellate  cases  it 
sampled,  plaintiff  relied  solely  on  the  fact  that  there  was  a 
defect  in  the  manufacture  of  the  product  that  caused  the  injury. 
Plaintiff  was  successful  in  58  of  those  cases,  was  unsuccessful 
in  36  and  46  were  remanded.  A  review  of  the  cases  strongly 
suggests  that  careful  product  liability  prevention  techniques  in 
the  area  of  quality  control  would  have  eliminated  the  basis  for 
many  of  those  lawsuits. 

The  same  source  showed  that  plaintiff  was  less  successful 
when  he  alleged  that  it  was  a  defect  in  design  that  caused  his 
injury.  Here,  product  liability  prevention  techniques  might  have 
prevented  some  of  the  suits  or  at  least  rendered  them 
unsuccessful.  On  the  other  hand,  some  cases  reflect  that  juries 
on  occasion  are  allowed  to  render  a  "hindsight  judgment"  about 
whether  the  manufacturer  designed  his  product  carefully.  Product 
liability  prevention  would  not  have  prevented  those  cases. 

Our  Industry  Survey  suggests  that  a  number  of  manufacturers 
(especially  small  businesses)  do  not  have  planned  product 
liability  loss  prevention  programs  in  the  basic  areas  of  design 
research  and  quality  control.   See  Chapter  IV  at  p.  3  -  4. 

The  Legal  Study  showed  that  some  manufacturers  do  not  provide 
adequate  instruction  about  the  dangers  that  may  spring  from  their 
products.  Product  liability  prevention  procedures  have  advanced 
to  a  point  where  consumer  product  misuses  may  be  anticipated 
before  they  occur.  Nevertheless,  a  few  courts  have  applied 
principles  of  hindsight  in  this  area  and  appear  to  require 
manufacturers  to  foresee  the  unforeseeable. 

Our  Industry  Study  suggests  that  some  manufacturers  do  not 
see  a  direct  relationship  between  product  liability  prevention 
and  insurance  premium  costs.  If  they  did  see  this  relationship, 
there  would  be  more  incentive  to  give  more  attention  to  product 
liability  prevention.  We  discuss  this  issue  and  remedies  that 
might  improve  the  situation  in  Chapter  VII  at  p.  238. 

It  has  been  suggested  that  insurers  be  required  to  provide 
product   liability   prevention   advice   to   their   insureds.    We 


1-25 


discuss   the   benefits  and  shortcomings  of  this  remedy  in  Chapter 
VII  at  p.  177. 

Finally.  it  has  been  suggested  that  the  government  might 
provide  additional  information,  data  or  actual  personnel 
assistance  to  manufacturers  to  aid  them  in  implementing  product 
liability  prevention  techniques.  Our  discussion  of  this  remedy 
and  its  implications  are  set  forth  in  Chapter  VII  at  p.  183. 

It  does  not  appear  that  industry  is  becoming  less  interested 
in  product  liability  prevention  techniques.  In  point  of  fact, 
limited  data  suggest  the  opposite  conclusion.  See  Chapter  VI  at 
p.  47.  Nevertheless  some  companies--espec ially  some  smaller 
ones--are  unable  to  devote  adequate  resources  to  product 
liability  prevention  programs  and  do  not  receive  assistance  from 
their  insurance  companies  in  regard  to  this  problem.  It  would 
appear  that  the  overall  product  liability  problem  would  be 
reduced  in  the  long  run  if  improvements  could  be  made  in  this 
area  . 

Cause  III :   The  Tort -Litigation  System 

Insurers  and  many  manufacturers  have  strongly  argued  to  the 
Task  Force  that  changes  in  the  tort-litigation  system  have  been 
the  primary  cause  of  the  product  liability  problem.  It  is 
alleged  that  the  system  has  brought  about  an  avalanche  of  claims, 
unreasonably  high  verdicts,  and  a  situation  where  persons  recover 
damages  simply  on  the  basis  of  showing  that  a  particular  product 
injured  them. 

Data  sources  conflict  as  to  whether  the  number  of  claims 
filed  has  increased  substantially  in  our  target  industries  over 
the  total  I97O-I976  period.  Our  industrial  contractor's 
telephone  survey  does  show  that  the  number  of  pending  claims  has 
increased  each  year.  As  has  been  indicated,  our  data  are  much 
less  certain  in  regard  to  whether  there  has  been  a  similar 
increase  in  the  size  of  judgments  or  verdicts.  Our  Legal  Study's 
review  of  655  appellate  cases  does  show  an  increase.  A  survey 
conducted  of  product  liability  cases  in  Cook  County  Illinois  from 
1970-1975  does  show  a  substantial  increase  in  the  size  of  awards. 
See  Chapter  II  at  p.  46.  It  is  also  relevant  to  note  that  our 
industrial  contractor  indicated  that  data  collected   from   public 


1-26 


accident  reporting  mechanisms  provide  some  indication  that  the 
number  of  product-related  injuries  in  most  of  our  target  groups 
has  not  increased  as  rapidly  as  the  number  of  product  liability 
claims.   See  Chapter  VI,  P.  39.  _. 

Limited  data  show  that  plaintiffs  do  not  win  every  litigated 
case.  Our  Legal  Study's  sampling  of  appellate  cases  shows  that 
the  defendant  "won"  in  approximately  49%  of  the  cases.  The  Cook 
County  Illinois  jury  survey  of  product  liability  cases  from  1970- 
1975  show  that  the  defendant  won  in  approximately  65%  of  the 
cases.  .  Nevertheless,  data  from  the  Insurance  Services  Office 
suggest  that  96%  of  product  liability  cases  are  settled  before 
court  verdict.  In  the  majority  of  cases  that  are  settled, 
plaintiff  receives  some  award. 

Our  Legal  Study's  review  of  the  tort-litigation  system 
suggests  that  it  does  not,  in  general,  impose  absolute  liability 
on  manufacturers  of  products.  In  many  situations,  a  jury  is 
asked  to  balance  the  economic  burden  on  the  manufacturer  to 
produce  a  safe  product  against  the  probability  that  the  product 
may  cause  injuries  and  the  severity  of  those  injuries.  In  light 
of  these  factors,  the  jury  is  asked  to  determine  whether  the 
product  is  reasonably  safe.  Nevertheless,  there  are  cases  which 
appear  to  approach  a  system  of  absolute  liability.  Some 
appellate  courts  do  not  view  product  liability  law  as  a  means  of 
apportioning  responsibility  between  parties,  but  as  a 
compensation  system.  These  courts  come  very  close  to  holding 
that  the  tort-litigation  system  should  provide  a  recovery  for 
persons  who  prove  that  they  were  injured  by  a  product.  These 
courts  believe  that  the  defendant  is  in  a  better  position  to 
"distribute  the  cost  of  the  risk"  than  the  plaintiff  is  to  bear 
it. 

While  these  cases  appear  to  be  relatively  few  in  number, 
insurers  have  regarded  them  as  quite  important  in  their  pricing 
practices.  As  the  Briefing  Report  observed,  insurance  company 
ratemaking  is  an  area  where  "perceptions  of  reality  become  as 
important  as  reality  itself..."  Briefing  Report  at  p.  14. 

Even  if  insurer  ratemaking  practices  were  substantially 
improved,  the  spectre  of  these  cases  could  still  serve  as  an 
arguable   justification   for   increasing   premiums.   If  one  state 


1-27 


court  reaches  a  decision  of  this  type,  others  could  follow  in  the 
future.  It  is  almost  impossible  to  predict  when  courts  will 
change  product  liability  rules  and  broaden  the  exposure  of 
insureds . 

The  instability  in  product  liability  law  has  increased  costs 
apart  from  verdicts  and  settlements.  It  has  created  a  climate 
where  it  may  be  rational  for  a  plaintiff's  lawyer  to  bring  a  case 
although  existing  rules  suggest  that  it  cannot  be  won.  It 
apparently    has    increased   defense   and   investigation   costs. 

Preliminary  data  from  the   Insurance   Services   Office   indicated 

15 
that  for  every  dollar  paid  to  a  claimant,  an  additional  $.42    is 

expended  in  defense  and  other  loss  adjustment  procedures. 

Individual  state  modifications  of  the  tort  system  may  not 
alleviate  this  problem.  Unlike  medical  malpractice,  attorney 
malpractice  and  municipal  liability  problems,  product  liability 
is  nationwide  in  scope.  This  is  because  most  products  are 
distributed  in  a  broad  number  of  jurisdictions.  Thus,  product 
liability  insurance  rates  are  made  on  a  nationwide,  not  a  local, 
basis.  Where  product  liability  insurance  costs  are  passed  on  in 
the  price  of  a  product,  consumers  in  some  jurisdictions  may  pay 
for  legal  interpretations  that  are  rendered  in  others. 

Among  the  primary  areas  of  uncertainty  in  basic  product 
liability  laws  are  the  rules  relating  to  the  responsibility  of 
the  manufacturer  in  designing  his  product  and  warning  about 
hazards  connected  with  that  product.  As  a  practical  matter, 
there  is  no  way  a  manufacturer  can  always  know  "in  advance" 
whether  he  has  designed  his  product  properly  or  given  proper 
warnings  about  hazards  connected  with  the  product.  Also,  in  most 
situations  there  is  no  strict  cut-off  point  where  a  manufacturer 
is  no  longer  subject  to  liability  for  an  injury  caused  by  a 
product.  Rules  are  also  in  flux  in  regard  to  the  responsibility 
a  product  user  should  bear  for  his  own  misconduct. 

We  have  concluded  that  this  cause  of  the  product  liability 
problem  can  only  be  addressed  by  a  careful  review  of  product 
liability  law  as  a  whole.  One  must  re-examine  the  basic  standard 
of  responsibility  for  product  users  and  product  liability 
defendants.  One  must  also  examine  rules  relating  to  damages  and 
how  costs  are  allocated  among  multiple  defendants.    It   is   also 


1-21 


important  to  discern  whether  no-fault  compensation  systems  can  be 
utilized  in  the  product  liability  field.  These  systems  have  the 
potential  of  providing  a  means  of  compensating  victims  of 
product-related  injuries  while  reducing  overall  transaction  costs 
that  arise  out  of  such  payments.  Finally,  there  is  a  need  to 
explore  suggestions  that  the  product  liability  injury  that  occurs 
in  the  workplace  might  be  handled  differently  from  consumer 
product  injuries.  In  Chapter  VII,  we  address  these  topics  and 
suggest  ways  in  which  this  cause  of  the  product  liability  problem 
might  be  reduced  or  eliminated. 

Other  Causes 

There  are  a  number  of  other  causes  of  the  product  liability 
problem  that  this  report  does  not  specifically  address.  These 
causes  do  not  appear  to  be  as  significant  as  those  identified 
above.   The  causes  include: 

(1)  Inflation .  When  a  product  liability  claim  is  made  for 
loss  of  wages  and  medical  costs  in  1976,  it  will  be 
higher  than  a  similar  claim  made  in  1970  because  of 
inflation.  Also,  legal  defense  and  investigation  costs 
have  increased  in  this  period.  There  are  no  data 
available  that  suggest  whether  the  average  product 
liability  judgment  has  risen  at  a  rate  that  is  higher 
than  inflation  over  the  past  five  years.  Some  limited 
surveys  suggest  that  this  may  be  true.  We  do  know  that 
the  cost  of  liability  insurance  for  many  companies  has 
risen  at  a  rate  that  is  substantially  higher  than 
inflation  for  the  years  197^  through  1976.  The  causes 
of  and  cures  for  inflation  go  beyond  the  scope  of  this 
report . 

(2)  Consumer  and  Worker  Awareness .  Anecdotal  data  suggest 
that  both  consumers  and  workers  are  now  more  aware  of 
their  right  to  bring  a  product  liability  suit  than  they 
were  ten  years  ago.  In  that  connection,  some  of  the 
increases  in  the  number  of  claims  may  relate  to  injuries 
from  defective  products  that  would  not  have  resulted  in 
lawsuits  in  the  past.  This  is  one  possible  explanation 
of  the  apparent  increase  in  the  number  of  product 
1 iabil ity  claims . 


1-29 


No  one  has  suggested  that  a  solution  to  the  product 
liability  problem  is  to  make  consumers  or  workers  less 
aware  of  their  rights.  On  the  other  hand,  some  have 
asserted  that  the  situation  has  resulted  in  some 
attorneys  "playing  upon"  consumer  awareness.  It  is 
alleged  that  the  result  is  that  frivolous  claims  are 
brought.  We  discuss  proposed  remedies  that  may  thwart 
the  bringing  of  frivolous  claims  in  Chapter  VII  at  p. 
62. 

( 3 )  Increases  in  the  Number  and  Complexity  of  Products . 
Anecdotal  data  suggest  that  in  some  product  lines  there 
has  been  an  increase  in  both  the  number  and  complexity 
of  items  manufactured.  Obviously,  this  will  result,  in 
the  long  run,  in  an  increase  in  the  number  of  product 
liability  claims.  We  have  been  unable  to  quantify  this 
cause  of  the  product  liability  problem,  and  no  one  has 
suggested  a  remedy  for  it.  It  would  seem,  however,  that 
continued  emphasis  on  product  liability  loss  prevention 
may  serve  as  a  counterweight  to  this  particular  cause  of 
the  product  liability  problem. 

(^)  Product  Misuse .  According  to  a  recent  survey  of  large 
product  liability  claims  by  the  Alliance  of  American 
Insurers,  misuse  and  alteration  of  products  by  product 
users  is  an  important  causal  factor  in  product-related 
accidents.  This  survey  was  based  upon  very  limited 
data;  nevertheless,  our  Legal  Study's  review  of  case 
law  reflects  that  product  misuse  is  a  factor  in  bringing 
about  product-related  injuries.  Even  where  a 
manufacturer  makes  a  reasonable  attempt  to  instruct 
users  about  dangers  connected  with  products, 
instructions  are  sometimes  ignored  or  unforeseeably 
misinterpreted  . 

The  insurer  and  manufacturer  groups  that  have  brought 
this  matter  to  our  attention  suggest  that  the  problem  of 
unreasonable  product  misuse  be  dealt  with  by  barring  or 
limiting  a  plaintiff's  claim.  See  Chapter  VII  at  p.  37- 
Of  course,  there  is  no  assurance  that  these  approaches 
would  prevent  unreasonable  product  misuse.  One  means 
whereby    this   cause   might   be   addressed   is   through 


1-30 


continued  consumer  education  by  manufacturers,  insurers 
and  government.  Nevertheless,  in  the  time  allotted  for 
our  study,  we  have  not  developed  specific  means  v;hereby 
this  education  could  be  increased  or  made  more 
effective . 


1-31 


-1 

See  Statement 
Capital,  Investmen 
Committee  on  Small 

2 
Briefing  Repo 

Technical  (Departm 

National   Technica 

Road ,  Spr  ingf ield , 

When  ordering  repo 

accession  number, 

NTIS)   should   be 

is  262  515  and  its 

^Initially  ei 
contractor,  with  t 
power  lawnmowers. 

The   Working 
has  pointed  out  th 
may   grow   as   mor 
diseases,  both  tho 
that  are  affected 


NOTES  TO  CHAPTER  I 


of  Mavis  A.  Walters  before  the  Subcommittee  on 
t   and   Business   Opportunities   of   the   House 
Business  (June  6,  1977)  . 

rt.  Interagency  Task  Force  on  Product  Liability 
ent  of  Commerce,  1/M/77).  Published  by  the 
1  Information  Service,  5285  Port  Street  Royal 
Virginia  22161  (Attention:  Sales  Desk), 
rts  reference  should  be  made  to  the  appropriate 
and  a  check  in  the  proper  amount  (made  out  to 
enclosed.  The  Briefing  Report  Accession  Number 
price  is  $4.50. 

ght   product  lines  were  selected.   The  industry 
he  approval  of  the  Task  Force,  added   a   ninth, 


Task  Force  member  from  the  Department  of  Labor 
at  health-related  product  liability  problems 
e  knowledge  is  gained  about  the  etiology  of 
se  that  are  occupationally  related  and  those 
by  environmental  problems. 


^The   papers   from   that   symposium   will   be   published  in  a 
supplement  to  this  report. 

Transcripts  of  the  meetings  are  available  at   the  Department 

of  Commerce. 

7 

'Copies   of   the   reports   may   be   obtained   from  NTIS .   For 

general  information  on  ordering  reports  see  note  2,  supra .  Legal 
Study:  Accession  Number  P.B.  263-601,  price  $31.25.  A  one- 
volume  Executive  Summary  has  also  been  published:  P.B.  265-450, 
price  $6 . 00. 

^Accession   Number  P.B.  263-600,  price  $9.00  (The  address  for 
ordering  is  listed  in  Note  2,  supra )  . 

g 
Undertaken  by  the  Alliance  of  American  Insurers. 

^"^Accession   Number   P.B.   265-542,  price  $21.25  (The  address 
for  ordering  is  listed  in  Note  2,  supra) . 

1  1 

Letter   from   Roye   L.   Lowry,  Clearance  Officer,  Office  of 

Management  and  Budget,  to  Mr.  Robert  P.  Jordan,  Clearance 
Officer,  Department  of  Commerce  (11/3/76). 

1  2 

Large    (a)   rated   classifications   are   those   for   which 

insufficient  data   are   reported   to   calculate   a   rate   through 

actuarial  techniques. 


1-32 


13 


73 


%      of  bodily  injury  and  83%  of  property  damage  claims  are 
without  lawsuit,  representing  7%  and  33%  respectively   of 
made . 

ported  losses  in  the  insurance  industry  are  often 
y  underwriting  losses.  There  is  a  distinction  between 
y  underwriting  losses  and  overall  underwriting  losses, 
tinction  is  developed  in  Chapter  V  at  p.  37. 

e  Task  Force  staff  has  been  informed  by  a  representative 
nsurance  Services  Office  that  the  Final  Closed  Claim 
ill  show  this  figure  to  be  $.35. 


settled 
payments 

14 

statutor 
statutor 
This  dis 

^^Th 
of  the  I 
Survey  w 

1  f\ 

Seventy-nine   cases   studied  where  a  claim  was  in  excess  of 

$100, 000. 


1-33 


Chapter  II 

Product  Liability  — 
A  Legal  Framework 


INTRODUCTION 

This  chapter  has  two  principal  parts.  Part  I  is  derived  from 
our  Legal  Study's  description  of  some  of  the  more  significant 
aspects  of  current  product  liability  law.  It  is  by  no  means  a 
complete  picture:  it  would  take  several  volumes  to  even  begin  to 
accomplish  that  goal.  Rather,  its  purpose  is  to  present  an 
overview  of  what  the  Task  Force  found  to  be  one  of  the  causes  of 
the  product  liability  problem  -  the  current  tort-litigation 
system . 

We  have  selected  five  specific  areas  of  product  liability  law 
for  discussion  in  this  chapter.  They  were  selected  on  the  basis 
of  information  gleaned  from  our  Working  Task  Force  Symposium, 
letters  to  the  Task  Force  and  independent  research  by  the  Task 
Force  staff.  Aside  from  presenting  a  picture  of  five  important 
areas  of  product  liability  law,  these  topic  areas  also  serve  as  a 
resource  for  discussion  of  some  of  the  remedial  proposals  set 
forth    in    Chapter    VII. 

Thus,  the  first  topic  area,  a  defendant's  duty  to  design  its 
product  properly,  and  the  second  topic  area,  a  defendant's  duty 
to  warn  users  or  consumers  about  hazards  connected  with  the 
product,  serve  as  a  resource  for  our  remedy  discussions  of  the 
basic  standard  of  responsibility  in  product  liability  cases,  p. 
VII-14,  modification  of  rules  relating  to  the  age  of  products,  p. 
VII-20,  a  duty  limitation  for  unavoidably  unsafe  products,  p. 
VII-29  and  the  development  of  predictable  legal  standards  for 
product  liability  cases,  p.  VII-33.  The  third  topic  area,  the 
burden  on  the  user  or  consumer  --  how  his  conduct  will  affect  his 
claims  --  serves  as  a  basis  for  our  discussion  of  remedies 
relating  to  the  problem  of  product  misuse,  p.  VII-47  and  the 
problem  of  plaintiff's  contributory  fault  or  assumption  of  risk 
at    p.    VII-51 . 

The  fourth  topic  area,  the  defendant's  ability  to  apportion 
risk  and  the  fifth,  product  liability  law  in  the  workplace,  are 
reservoirs  for  our  remedy  discussions  concerning  modifications  of 
product  liability  law  relating  to  a  defendant's  right  against 
third  parties  --  the  problem  of  the  workplace  injury  at  p.  VII- 
85. 


II-1 


Part  II  of  this  chapter  sets  forth  our  legal  contractor's 
review  of  product  liability  data  that  have  been  derived  directly 
from  the  legal  system.  The  first  section  describes  what  could  be 
found  about  product  liability  claims  and  settlements  from  legal 
resources.  This  includes  a  description  of  data  compiled  by  the 
Director  of  the  Administrative  Office  of  the  United  States 
Courts,  by  the  Judicial  Department  of  the  State  of  Connecticut 
(the  only  state  to  collect  and  report  data  specifically  on 
product  liability  cases),  the  Illinois  Jury  Report  Survey  and  the 
Kansas  Trial  Lawyers'  Association  survey  of  product  liability 
cases  tried  in  Kansas  City  from  1967-1975. 

The  second  portion  of  this  section  sets  forth  the  results  of 
a  product  liability  survey  undertaken  by  our  legal  contractor. 
The  contractor  surveyed  655  appellate  cases  from  eight 
representative  states.  The  basis  for  the  selection  of  those 
states  is  set  forth  on  p.  47. 


While    appellate   cases 
transpires  at  the   trial   lev 
attorneys   at   our   Working 
product  liability  appellate 
"what  goes  on"  at  the  trial  1 
This  is  because  product  liabi 
is  more  likely  to  be  an  appea 
have  utilized  these  data,  alb 
we   set   forth   our  ultimate 
discuss  remedies.   We  have  pr 
make  additional  use  of  it. 


do  not  necessarily  reflect  what 
el,  both  plaintiff  and  defendant 
Task  Force  Symposium  advised  us  that 
cases  are  more  representative  of 
evel  than  in  other  areas  of  the  law. 
lity  law  is  still  in  flux  and  there 
1  when  verdicts  are  substantial.  We 
eit  cautiously,  in  Chapter  VI  where 
findings  and  in  Chapter  VII  where  we 
esented  it  here  so  that   others   may 


We  did  not  have  the  resources  or  time  to  survey  product 
liability  cases  at  the  trial  court  level.  We  have  been  advised 
that  such  an  undertaking  would  be  complicated  and  very  costly, 
since  most  trial  courts  do  not  separate  "product  liability"  cases 
from  other  general  liability  cases. 

As  other  portions  of  the  report  show,  however,  we  have  been 
able  to  glean  some  picture  of  what  is  "happening"  at  the  trial 
court         level.  This         was         accomplished         by      our       industrial 

contractor's  survey  of  the  claims  experience  of  337  corporations. 
We  were  also  able  to  obtain  some  picture  of  claims  at  the  trial 
court    level    from    surveys    undertaken      by      20      trade      associations, 


1 1 -2 


insurance  groups  and  others.  The  trade  association  surveys  are 
set  forth  in  Chapter  III  and  the  insurance  group  surveys 
including  the  Insurance  Services  Office's  preliminary  closed 
claim  survey  are  discussed  in  Chapter  V. 

AN  OVERVIEW  OF  PRODUCT  LIABILITY  LAW 

Introduction 

As  one  reviews  the  product  liability  cases  from  the  past  two 
decades,  it  is  clear  that  courts  did  not  intend  to  create  a 
product  liability  problem.  Rather,  they  were  attempting  to  weed 
the  law  of  antiquated  doctrine  or  stumbling  blocks  that  appeared 
to  deprive  injured  plaintiffs  of  their  right  to  recover  against 
manufacturers  of  defective  products.  For  many  decades  an  injured 
consumer  was,  in  theory,  entitled  to  damages  when  the  product 
that  injured  him  was  negligently  manufactured.  Often,  however, 
the  plaintiff  was  unable  to  show  that  the  defendant  failed  to  act 
as  a  reasonable  manufacturer,  or  he  was  barred  because  he  was 
contr ibutor ily  negligent  with  respect  to  the  product.  Sometimes 
his  claim  failed  because  he  was  unable  to  reach  the  manufacturer 
of  the  product  by  judicial  process.  Instead,  he  was  only  able  to 
sue  the  retailer  or  distributor  of  the  product  and  was  unable  to 
prove  negligence  against  those  parties. 

An  alternative  approach  to  negligence  was  the  law  of 
warranty.  Here  plaintiff  only  had  to  show  that  the  product  was 
unreasonably  constructed  or  designed  in  regard  to  its  intended 
use.  But  in  cases  other  than  those  dealing  with  foods  or 
cosmetic  preparations,  the  courts  usually  required  that  the 
plaintiff  be  in  privity  of  contract  with  the  defendant. 
Therefore,  if  a  non-purchaser  was  injured,  his  claim  had  to  be 
based  on  negligence.  The  privity  requirement  was  so  important 
that  it  was  commonly  referred  to  as  a  "citadel." 

"The  Fall  of  the  Citadel,"  according  to  the  late  Dean 
Prosser,  occurred  on  May  9,  I960,  when  the  Supreme  Court  of  New 
Jersey  announced  the  decision  in  Henningsen  v.  Bloomfield  Motor  s , 
Inc .  The  Henningsen  court  held  the  manufacturer  and  dealer  of  a 
defective  automobile  liable  for  a  breach  of  implied  warranty 
without  any  showing  of  negligence  and  without  privity  of 
contract.    The   basis   of   the   decision   was  that  when  a  seller 


II-3 


places  a  defective  product  into  the  stream  of  commerce,  the  loss 
should  fall  on  that  seller,  who  is  in  a  position  to  control  the 
danger  and  to  distribute  the  losses  equitably,  rather  than  on  the 
innocent  plaintiff,  who  cannot  control  the  danger  and  who  has 
less  ability  to  distribute  the  loss. 

3 
Greenman   v.   Yuba   Power  Prod  uc ts ,  Inc  .  ,   a  1963  decision  of 

the  Supreme  Court  of  California,  represents  the  next   significant 

development   in   the   evolution   of   a  cause  of  action  other  than 

negligence  in  product   liability   cases.    While   Henningsen   was 

based   on   the   contractual  theory  of  breach  of  implied  warranty, 

the  Greenman  decision  rested  in  tort--the  cause  of  action  was  one 

of   strict   tort   liability.   Thus,  although  the  rationale  of  the 

Greenman  decision  was  congruent   with   that   of   Henningsen  ,   the 

theory  of  recovery  differed. 

The  court  in  Greenman  recognized  what  had  occurred  in  a  long 
series  of  cases  that  ended  with  Henningsen .  A  doctrine  that  had 
in  the  twentieth  century  been  associated  with  contracts 
(warranty)  was  being  utilized  to  create  a  new  cause  of  action  in 
tort.  The  Greenman  court,  by  identifying  the  true  legal  basis 
for  the  cause  of  action,  hoped  to  bring  more  rationality  to  the 
system.  For  example,  by  labeling  the  product  liability  claim  one 
of  tort  rather  than  warranty,  technical  requirements  (such  as  the 
commercial  code's  requiring  that  a  notice  to  a  seller  be  supplied 
within  a  reasonable  time  after  the  buyer  discovers  a  defect) 
could  be  avoided  when  they  were  inappropriate. 

Henn  ingsen  and  Greenman  were  important  building  blocks  in 
establishing  a  new  cause  of  action  in  product  liability  cases. 
Under  the  reasoning  of  these  decisions,  the  plaintiff  was  no 
longer  required  to  prove  negligence  on  the  part  of  the 
manufacturer  or  seller  in  order  to  recover  for  injuries  arising 
through  the  use  of  a  defective  product.  Instead,  the  focus  was 
shifted  from  the  conduct  of  the  manufacturer  to  the  performance 
of  its  product.  If  the  product  proved  to  be  defective,  then  the 
parties  responsible  for  placing  the  product  into  the  stream  of 
commerce  were  liable  to  the  plaintiff  for  the  injuries  caused  by 
the  product. 

Over  time  most  courts  extended  the  rationale  of  these  cases 
to  both  retailers  and  distributors.   It  would  appear  that   strict 


II-M 


liability  may  strike  at  these  groups  more  harshly  than 
manufacturers:  retailers  and  distributors  are  often  in  a 
situation  where  they  have  neither  the  ability  nor  the  opportunity 
to  discover  or  correct  defects  in  a  product.  In  point  of  fact, 
case  law  suggests  that  retailers  and  distributors  are  usually 
able  to  transfer  the  cost  of  a  product  liability  judgment  back  on 
to  the  manufacturer.  Nevertheless,  it  has  been  reported  to  the 
Task  Force  that  these  groups  are  still  subject  to  substantial 
defense  costs.  Courts  extended  strict  liability  to  retailers  and 
distributors,  in  part,  on  the  assumption  that  those  groups  would 
place  pressure  on  the  manufacturer  to  produce  safe  products. 
Courts  also  believed  that  retailers  and  distributors  might  be 
more  accessible  to  suit  than  manufacturers. 

Although  the  Henningsen  ,  Greenman  and  other  early  strict 
product  liability  cases  dealt  with  consumer  goods,  courts  soon 
applied  the  same  theory  to  workplace  injuries.  Some  have  argued 
that  there  was  less  need  to  have  strict  liability  with  respect  to 
product-related  workplace  injuries.  The  basis  for  this  argument 
is  that  the  injured  worker  often  has  recovered  medical  costs  and 
a  percentage  of  his  loss  of  earnings  through  Worker  Compensation, 
whereas  the  consumer  (unless  successful  in  a  product  liability 
action)  has  often  obtained  no  compensation  whatsoever. 

The  protection  established  by  Henn  ingsen  and  Greenman  was 
also  extended  beyond  users  and  consumers  of  products  to  all 
persons  who  might  foreseeably  be  injured  if  a  product  misfired. 

Finally,  the  Henningsen  and  Greenman  cases  (which  dealt  with 
injury  to  the  person)  were  extended  to  situations  where  there  had 
been  property  damage.  To  date,  most  courts  have  drawn  the  line 
at  that  point  and  decline  to  apply  strict  liability  in  tort  where 
there  has  been  pure  economic  loss. 

As  far  back  as  1965  with  the  promulgation  of  Section  402A  of 
the  Restatement  (Second)  of  Torts  ,  it  was  hoped  that  reasonably 
uniform  standards  might  evolve  for  strict  product  liability  law. 
Nevertheless,  these  hopes  have  not  borne  fruit.  To  illustrate 
this  fact  we  will  examine  some  of  the  more  important  doctrinal 
areas  where  diversity  of  view  has  arisen.  A  common  theme  in  each 
of  these  areas  is  a  difference  in  perspective  (identified  in  the 
Task  Force's  Briefing  Report)  between   courts   who   view   product 


II-5 


liability  law  as  a  means  of  apportioning  responsibility  based  on 
fault  and  those  who  assume  that  this  area  of  law  should  be  a 
compensation  system  for  persons  injured  by  products.  See 
Briefing  Report  at  p.  13- 

Some  Major  Issues  in  Product  Liability  Law 

A  Manufacturer's  Duty  to  Design  Its  Product  Properly 

Introduction 

While  most  courts  agree  that  the  duty  of  the  manufacturer  is 
to  design  a  product  that  is  not  "defective,"  no  satisfactory 
definition  of  the  term  "defect"  has  been  articulated.  Michael 
Hoenig  has  recently  remarked,  in  fact,  that  "[w]hat  constitutes  a 
defect  is  no  clearer  today  than  it  was  a  decade  ago  when  Section 
402A  of  the  Restatement  (Second )  of  Torts  was  published."  The 
term  is  particularly  difficult  to  define  in  connection  with  cases 
where  the  alleged  defect  is  one  of  design.  On  the  one  hand,  in 
cases  involving  manufacturing  defects,  the  plaintiff  need  merely 
illustrate  that  the  performance  of  the  product  was  deficient;  on 
the  other  hand,  in  cases  involving  alleged  design  defects,  the 
plaintiff  must  impugn  a  conscious  design  choice  of  the 
manufacturer.  Courts  have  had  problems  in  both  defining  and 
applying  the  so-called  strict  liability  standard  where  plaintiff 
has  alleged  that  a  design  was  defective. 


11 


Defectiveness  and  Strict  Liability 

In  the  1963  case  of  Greenman  vs.  Yuba  Power  Products ,  Inc 
where  the  underlying  rationale  of  strict  liability  was  set  forth 
by  Justice  Traynor  of  the  Supreme  Court  of  California,  it  was 
held  that  a  manufacturer  is  strictly  liable  when  its  product 
"proves  to  have  a  defect  that  causes  injury  to  a  human  being." 
The  Greenman  court  did  not  undertake,  however,  to  define  the 
meaning  of  defect.  In  1965,  when  the  Restatement  (Second )  of 
Torts  was  published,  it  was  postulated  in  Section  402A  that  one 
who  sells  any  product  in  a  "defective  condition  unreasonably 
dangerous"  is  subject  to  liability  for  physical  harm  caused  by 
the  product,  even  though  the  seller  exercised  all  possible  care 
in  preparing  and  selling  the  product.  Thus,  notwithstanding  the 
fact   that   the   court  in  the  Greenman  case  held  the  manufacturer 


II-6 


liable  for  any  product  which  proved  to  have  a  "defect,"  the 
Restatement  used  the  differently-worded  standard  of  a  "defective 
condition    unreasonably   dangerous." 


The  term  "unreasonably  dangerous"  generated  little  discussion 
in  the  years  immediately  after  the  inception  of  Section  402A. 
Those  courts,  including  the  Supreme  Court  of  California,  which 
applied  the  strict  liability  doctrine,  often  spoke  of  the 
Greenman    standard    and    Section    402A    as    basically    synonymous.  It 

was  not  until  the  decision  of  the  Supreme  Court  of  California,  in 
Cronin  v.  J . B. E.  01  son  Corp  .  ,  that  a  controversy  was  created. 
The  Cronin  case  attempted  to  analyze  the  two  standards  and  found 
the  Greenman  formula  to  be  preferable  because  the  "unreasonably 
dangerous"  element  had  the  effect  of  introducing  negligence- 
related  considerations  into  a  strict  liability  case.  The  court 
held  that  the  plaintiff  need  not  show  a  product  to  be 
"unreasonably  dangerous"  in  order  to  recover  on  a  strict 
liability    theory. 

The  approach  advocated  by  the  Cronin  cour t--allowing  the 
issue  of  defect  to  be  decided  in  an  "intuitive"  manner--has 
created  great  confusion  and  has  met  with  widespread  resistance. 
For  example,  this  approach  has  been  compared  to  instructing  the 
jury  in  a  negligence  case  that  the  defendant  is  liable  if  he 
breached  a  duty  owed  to  the  plaintiff,  without  defining  the  duty 
as      that      of      reasonable      care.  Many      courts    have    expressed    a 

preference  for  the  Restatement  formula  as  opposed  to  that  adopted 
in      California.  Other      courts,      however,    for    various    reasons, 

have  rejected  the  "unreasonably  dangerous"  standard  in  favor  of  a 
different  test.  Substitutions  for  the  "unreasonably  dangerous" 
test    include    the    imposition    of   liability      in      Washington      if      the 


product 


IS  "not  reasonably  safe" 

18 
is  "dangerously  defective."     Still  another 


or,  in  Oregon,  if  the  product 


V  iew   i  s   that 


term  "defective"  is  synonymous  with  "unreasonably  dangerous 


1 


.he 


20 
Many  states,  of  course,  continue  to  adhere  to  Section  402A. 

Others  recognize  Section  402A  but  adapt  it  to  reflect   principles 

established   in   the  state  law.   Wisconsin,  for  example,  purports 

to  recognize   Section   402A   but   holds   that   the   Section   402A 

standard   is  the  equivalent  of  negligence  per  se .     New  York  has 

established  a  negligence-based  cause  of  action   entitled   "strict 

products   liability,"   which  states  the  ingredients  for  liability 


II-7 


22 
and  the  applicable  defenses  in  one  three-pronged  formula.      The 

formula   provides   that   the   manufacturer  of  a  defective  product 

which  causes  injury  is  liable  if  (1)  the  product  was   being   used 

for    its    intended    pur  pose-- thi s   also   includes   foreseeable 

23 
misuses;    (2)  the  user  would  not,  by  the  exercise  of   reasonable 

care,   have   discovered   the  defect  and  perceived  its  danger;  and 

(3)  the  person  injured  could  not,  by  the  exercise   of   reasonable 

care,   have   averted  the  injury.   A  majority  of  the  judges  on  the 

New   York   Court   of   Appeals   have   recently   reaffirmed    their 

preference  for  the  New  York  rule,  which  recognizes  the  defense  of 

contributory  negligence  in  a  strict  liability  action,  as   opposed 

to  the  standard  enunciated  in  Section  402A. 

This  wide  disparity  surrounding  both  the  definition  of  defect 
and  the  most  desirable  form  of  strict  liability  has  led  to 
substantial  confusion  and  unequal  treatment  of  products  cases  in 
state  courts. 

Strict  Liability  in  Design  Cases 

The  process  of  applying  strict  liability  in  design  defect 
cases  is  somewhat  different  from  that  in  manufacturing  defect 
cases.  Inasmuch  as  strict  liability  was  initiated  to  alleviate 
problems  of  the  plaintiff's  burden  of  proof,  it  is  clear  that  the 
theory  works  reasonably  well  in  manufacturing  defect  cases  where 
the  defect  was  in  the  construction  of  the  product.  In  design 
defect  cases,  on  the  other  hand,  the  alleged  defective  design  is 
the  result  of  a  conscious  choice  of  the  manufacturer  to  design 
its  product  in  a  certain  manner.  Thus,  although  strict  liability 
shifts  the  focus  from  the  conduct  of  the  manufacturer  to  the 
performance  of  the  product,  the  way  in  which  the  product  was 
designed  resulted  from  a  conscious  human  choice.  Consequently, 
some  courts  have  pointed  out  that  the  results  in  design  cases 
seldom  differ,  whether  the  cause  of  action  is  one  of  negligence 
or    of    strict    liability. 

Dean  Wade  has  pointed  out  that  the  difference  between 
negligence  and  strict  liability  in  design  defect  cases  should  be 
that  the  element  of  scienter--knowledge  of  the  risks  created  by  a 
product--is  imputed  to  the  manufacturer  when  strict  liability  is 
applied.  Yet,    even    when    the    negligence    standard    of   reasonable 

care    is    imposed,    the   manufacturer    is    still      obligated       to      assume 


II-8 


the  position  of  an  expert  in  the  field  and  to  keep  abreast  of  the 
most    recent    scientific    developments      in      the      industry.  Under 

this  standard,  the  negligence  test  of  whether  the  manufacturer 
knew  or  should  have  known  of  the  dangers  is  only  slightly  less 
demanding  than  the  strict  liability  technique  of  imputation  of 
knowledge  of  the  dangers.  As  Dean  Keeton  has  observed,  "strict 
liability  as  to  design  defects  is  virtually  a  myth,"  unless 
knowledge  of  scientifically  unknowable  risks  is  imputed  to 
manufacturers      when      strict    liability    is    applied.  Because   most 

courts  have  refused  to  impute  knowledge  of  unknowable  risks  to 
manufacturers,  negligence      and    strict    liability    are    functional 

equivalents    in    design   defect   cases    in   most    states. 


To  determine  whether  a  product  is  defectively  designed,  the 
risks  presented  by  the  product  must  be  weighed  against  its 
utility.  A  product  which  presents  substantial  risks  is  not 
necessarily  defective,  as  it  may  also  have  great  utility.  In 
balancing  the  risks  and  utility  of  the  product,  one  of  the  most 
comprehensive  lists  of  factors  to  be  considered  has  been  proposed 
by  Dean  Wade,  and  has  been  adopted  by  courts  in  Oregon  and 
Arizona         as    well    as    the    Federal    District    Court    for      the      Eastern 


District      of      Pennsylvania 
considered    are: 


Under    this    test,    the    factors    to    be 


(1)  The  usefulness  and  desirability  of  the  product--its 
utility    to    the    user    and    to    the    public    as    a    whole. 

(2)  The  safety  aspects  of  the  product--the  likelihood  that 
it  will  cause  injury,  and  the  probable  seriousness  of 
the    injury. 

(3)  The  availability  of  a  substitute  product  which  would 
meet    the    same    need    and    not    be    as    unsafe. 

(4)  The  manufacturer's  ability  to  eliminate  the  unsafe 
character  of  the  product  without  impairing  its 
usefulness  or  making  it  too  expensive  to  maintain  its 
ut il ity . 

(5)  The  user's  ability  to  avoid  danger  by  the  exercise  of 
care    in    the    use    of   the    product. 


II-9 


(6)  The  user's  anticipated  awareness  of  the  dangers  inherent 
in  the  product  and  their  avoidabil ity ,  because  of 
general  public  knowledge  of  the  obvious  condition  of  the 
product,  or  of  the  existence  of  suitable  warnings  or 
instr uc  tions . 


(7)   The   feasibility, 


on   the   part  of  the  manufacturer,  of 

the   product 


spreading  the  loss  by  setting  the  price  of 
or  carrying  liability  insurance. 


The  User's  Conception  of  the  Product 


One  of  the  most  important  factors  that  some  courts  have 
considered  in  the  test  of  defectiveness  in  design  cases  is  the 
sixth  factor  enumerated  by  Dean  Wade--the  user's  anticipated 
awareness  of  the  dangers  in  the  product.  The  Restatement 
definition  of  "unreasonably  dangerous"  is  that  "the  article  sold 
must  be  dangerous  to  an  extent  beyond  that  which  would  be 
contemplated  by  the  ordinary  consumer.  .  .  ."  Following  the 
Restatement ,  a  number  of  courts  have  adopted,  as  the  sole  test  of 
defectiveness,  the  test  of  whether  the  product  was  dangerous  to 
an  extent  beyond  that  contemplated  by  the  ordinary  consumer. 
Other  courts,  however,  have  advocated  its  use  only  in  conjunction 
with  the  other  balancing  factors. 


Related  to  the  consumer's  expectations  of  the  product  is  the 
open  and  obvious  nature  of  the  danger.  It  had  long  been  the 
majority  rule  that  the  open  and  obvious  nature  of  the  dangerous 
condition  barred  recovery  because  the  manufacturer  of  the  product 
had  no  duty  to  guard  against,  or  to  warn  of  the  dangers  of,  an 
obviously  dangerous  condition.   Although  many  courts  continue   to 


adhere   to   this   view. 


the   "open  and  obvious"  bar  has  become 


subject  to  increasing  criticism  over  the  years,  and  an  increasing 
number  of  courts  have  repudiated  its  rigidity.  There  may  be  a 
limited  number  of  situations  where  a  manufacturer  can  easily 
correct  or  warn  about  an  obvious  danger  without  in  any  way 
impairing  the  utility  of  the  product;  the  obvious  risk  may  not  be 
an  inherent  one.  The  New  York  Court  of  Appeals  has,  in  fact, 
recently  overruled  the  case  of  Campo  v.  Scof ield ,  which  had 
been  the  leading  case  in  support  of  the  "open  and  obvious"  rule. 
Thus,  the  majority  view  is  now  that  the  open  and   obvious   nature 


11-10 


of  the  danger  is  only  one  factor  to  be  considered  in  conducting 
the    balancing    test    of   defectiveness. 

The  open  and  obvious  danger,  however,  should  be  contrasted 
with  the  commonly  known  danger.  In  the  latter  situation,  the 
danger  of  the  product  may  be  such  common  knowledge  that  the 
product  cannot  be  considered  to  be  defective.  "Although  a  knife 
qualifies  as  an  obviously  dangerous  instrumentality,"  for 
example,  "a  manufacturer  need  not  guard  against  the  danger  that 
it      presents."  This      type    of   hazard    is    an    inherent    risk   of   the 

product;  it  is  also  one  that  all  reasonable  persons  would  be 
aware    of    in    the    course    of   using    the    product. 

The    Manufacturer's    Ability   to    Make    the    Product    Safer 

Another  of  the  most  important  considerations  in  Dean  Wade's 
formulation  of  the  test  for  defectiveness  is  the  fourth--the 
manufacturer's  ability,  within  practical  and  technological 
limits,  to  improve  the  safety  of  the  product.  The  availability 
of  possible  alternative  designs  and  matters  relating  to  industry 
custom  relate  to  the  "state-of-the-art"  issue.  While  the  custom 
of  the  industry  is  important  in  determining  whether  the  product 
is  unreasonably  dangerous,  the  position  that  conformance  with 
industry  custom  is  not  an  absolute  defense  is  a  virtually 
unanimous  view,  as  many  courts  have  realized  that  an  entire 
industry  may  have  been  at  fault  in  not  improving  its 
techniques.  Illinois      is      the      one      state      which      holds      that 

evidence  of  industry  custom  is  immaterial  in  a  strict  liability 
suit,  and  that  the  matter  of  whether  a  safer  design  was 
feasible  at  the  time  that  the  product  was  marketed  is  also 
immaterial    for    strict    liability    purposes. 

The  "state  of  the  art"  problem  is  particularly  troublesome  in 
regard  to  product-related  injuries  which  are  incurred  through  the 
use  of  older  products.  Manufacturers  have  complained  that 
liability  has  been  imposed  in  such  cases,  even  where  the  product 
has  been  used  for  prolonged  periods,  passed  through  several 
owners'  hands  and  modified  in  varying  degrees,  including  removal 
of  some  safety  features.  Nevertheless,  our  legal  contractor's 
examination  of  the  case  law  reflects  that  most  courts  refused  to 
impose  liability  where  the  evidence  indicated  that  the  accident 
in    question    was    caused    by   normal    wear    and    tear    of   the      product. 


II-1  1 


In  order  to  reach  the  jury,  the  plaintiff  must  introduce 
sufficient  evidence  to  justify  the  drawing  of  an  inference  that 
the  defect  existed  when  the  product  left  the  hands  of  the 
manufacturer.  Where  the  evidence  merely  illustrates  that  an 
accident  happened  after  years  of  prolonged  use,  and  possible 
misuse,  of  the  product,  and  there  is  no  evidence  from  which  to 
conclude  that  the  product  was  defective  at  the  time  of  sale, 
judgment  will  usually  be  entered  for  the  manufacturer. 
Nevertheless,  there  often  is  a  conflict  in  the  evidence  and  the 
matter    is    left    to    the    jury    to    decide.      See    VII-3^. 

Conclusion 

While  the  balancing  approach  is  a  conceptually  sound 
technique  to  apply  in  deciding  design  issues,  it  is  by  no  means 
an  easy  test,  whether  the  factors  involved  are  weighed  by  the 
judge  or  by  the  jury.  Due  to  the  complexities  involved  in  the 
process,  a  return  to  negligence  law  has  been  advocated  as  one 
means   of  minimizing    the    uncertainty    in    design    cases.  Professor 

Henderson      contends      that      design      cases    are    "polycentr ic"    to    the 
extent    that    they    should    not      be      judicially      resolved      at      all. 
Professor      Twerski      and      his      colleagues      disagree.  With    such 

diversity  of  opinion,  a  uniform  approach  to  design  cases  does  not 
seem  close  at  hand.  Nevertheless,  the  distinction  between 
"strict  liability"  and  "negligence"  in  product  liability  is  often 
more  one  of  language,  than  actual  results.  The  time  may  have 
arrived  to  make  the  law  clear  as  to  what  is  required  in  regard  to 
the  manufacturer's  duty  to  design.  At  p.  VII-13,  some  suggestions 
are   made    as    to    how   this   might    be    accomplished. 

The    Manufacturer's    Duty    To    Warn    Users   or    Consumers 
About    Hazards    Connected    With    Its    Product 

Introduction 


A  manufacturer  has  a  duty  to  warn  purchasers  and  users  of  its 
product  of  the  dangers  associated  with  the  use  of  that  product. 
Liability  for  failure  to  give  such  warning  may  be  predicated  on 
negligence.         strict    liability    in       tort,  and       even      breach      of 

warranty.  The      doctrine      has      wide      applicability      and    it    has 

recently   been    observed    that    "almost    every   product    liability      case 
has    a    potential    issue    of    failure    to    warn." 


11-12 


The   frequency  with  which  plaintiffs  use  failure  to  warn  as  a 

basis  for  asserting  that  manufacturers  should  be  held  liable   for 

injuries   which   result  from  the  use  of  their  products  stems  from 

two  major  factors.   The  most  important  is   that   courts   commonly 

require  no  additional  showing,  either  of  fault  on  the  part  of  the 

manufacturer  or  of  a  defect  in  the  product,  in  order  to   allow   a 

plaintiff   to   recover  for  injuries  which  occurred  because  of  the 

absence  of  a   proper   warning.      As   a   result,   plaintiffs   in 

product   litigation   often   rely  on  an  alleged  failure  to  warn  in 

order  to  avoid  the  proof  problems  involved  in   demonstrating   the 

5  ^ 
existence  of  manufacturing  or  design  defects. 

Even  in  situations  where  other  kinds  of  defects  are  alleged, 
plaintiffs  frequently  rely  on  manufacturers'  failures  to  warn  as 
an  alternative  ground  for  claiming  damages.  There  is  a 
particular  logical  nexus,  for  example,  between  a  manufacturer's 
duty  to  design  a  product  which  is  safe  for  ordinary  use  and  its 
duty  to  warn  of  the  dangers  of  a  product  which  has  not  been--or 
even  cannot  be — designed  to  be  completely  safe.  Where,  however, 
the  manufacturer  does  in  fact  provide  an  adequate  warning,  it 
will  sometimes  insulate  him  from  liability  for  harm  caused  by 
what  would  otherwise  be  a  design  defect.  Where  the  testing, 
processes  of  the  manufacturer  are  inadequate,  on  the  other  hand, 
courts  have  usually  imposed  liability  on  the  failure  to  warn  \ 
rather  than  on  the  failure  to  test  the  product  adequately.        "*■ 

Theories  of  Recovery 

Despite  the  extensive  litigation  surrounding  the  duty  to 
warn,  there  is  nevertheless  much  confusion  as  to  the  doctrinal 
underpinnings  of  the  duty.  Primarily,  there  is  strong 
disagreement  as  to  whether  the  three  possible  legal  theories  of 
recovery  provide  distinct  tests  for  determining  the  existence  or 
discharge  of  the  duty.  In  the  early  decisions  following  the 
promulgation  of  Section  M02A  of  the  Restatement  (Second )  of 
Torts ,  the  courts  usually  concluded  that  the  three  theories 
provided  identical  standards  for  determining  whether  the  duty  to 
warn  existed,  and  whether  it  was  discharged  in  a  particular  case. 

In   some   of   these   cases,   courts   have  explicitly  stated  their 

57 
belief  in  the  identity  of  two  or  more  of   the   three   theories. 

Under   this   view,   it   is  said  that  the  test  under  any  theory  is 

whether   the   manufacturer   "adequately   warned    of    known    or 


11-13 


reasonably  foreseeable"  dangers  involved  in  the  use  of  his 
product.  In  other  cases  courts  have  used  the  negligence 
standards  of  the  Restatement  (Second )  of  Torts  Section  388  and 
the  strict  liability  standards  of  Section  402A  interchangeably  in 
duty  to  warn  contexts  and  thus  implicitly  have  not  recognized  any 
major  difference  in  the  standards.  In  one  case,  for  example,  it 
was  held  that  Sections  388  and  402A  were  "consistent,"  the  strict 
liability  test  being  that  a  product  is  "unreasonably  dangerous" 
if  the  manufacturer  failed  to  give  a  warning  "reasonable  under 
the  circumstances."  Another  court  used  the  "unreasonably 
dangerous"  standard  of  Section  402A  to  determine  a  manufacturer's 
liability  for  negligence. 

In  contrast  to  these  holdings  that  the  three  theories  of 
liability  are  identical  in  duty  to  warn  cases  is  a  growing  trend 
of  decisions  in  which  courts  have  held  that  the  theories  provide 
distinct  criteria  for  analyzing  the  duty.  These  cases  hold  that 
the  distinction  between  strict  liability  and  negligence  is  that 
strict  liability  focuses  on  the  condition  of  the  product  which  is 
sold  without  a  warning,  while  negligence  relates  to  the 
reasonableness  of  the  manufacturer's  actions  in  selling  the 
product  without  a  warning.  However,  these  courts  do  inject 
some  elements  of  negligence  into  the  strict  liability  test.  The 
strict  liability  test  in  determining  whether  a  product  is 
unreasonably  dangerous  is  to: 

assume  the  seller  knew  of  the  product's  propensity  to 
injure  as  it  did,  and  then  to  ask  whether,  with  such 
knowledge,  he  would  have  been  negligent  in  selling  it 
without  a  warning. 

The  confusion  between  the  two  approaches  may  be  attributed  to 
two  concrete  causes.  Part  of  the  problem  stems  from  the  language 
of  two  comments  to  Section  402A.  Comment  j  requires  that,  for  a 
manufacturer  to  avoid  strict  liability  for  the  allergic  reactions 
which  some  users  may  have  to  its  product,  it  must  warn  of  the 
possibility  of  the  reaction  if  it  "has  knowledge,  or  by  the 
application  of  reasonable  human  skill  and  foresight  should  have 
knowledge"  of  the  presence  of  the  allergenic  ingredient  and  the 
danger.  Comment  h  requires  the  seller  to  warn  of  dangers  which 
may  result  from  a  particular  use  of  its  product,  where  it  "has 
reason   to  anticipate  that  danger  may  result"  from  the  particular 


11-14 


6M 
use.  Both      comments      place      the      emphasis      on      the         seller's 

knowledge   of   the    dangers    that    exist,    rather    than    on    the    dangerous 

properties   of   the    product    itself. 

Nevertheless,  it  is  clear  that  the  major  source  of  the 
confusion  is  a  conceptual  one.  The  tests  as  to  whether  a  product 
is  unreasonably  dangerous  without  an  adequate  warning  or  whether 
a  manufacturer  is  negligent  in  failing  to  provide  a  warning  both 
involve  a  consideration  of  the  danger  the  product  presented  to 
the  unwarned  public  at  the  time  the  product  was  placed  on  the 
market.  Since  under  negligence  principles,  the  manufacturer  is 
held  to  the  standard  of  an  expert  in  the  field,  there  is  no 
significant  difference  between  negligence  and  strict  liability 
unless  manufacturers  are  held  liable  for  failing  to  warn  of  risks 
which  were  unknowable  or  unforeseeable  when  the  product  was 
marketed.  In  decisions  studied  by  our  legal  contractor,  courts 
held  the  manufacturer  responsible  only  for  risks  known  at  the 
time  of  marketing.  Consequently,  under  the  present  state  of  the 
law  in  most  states,  negligence  and  strict  liability  in  warning 
cases    appear    to    be    functional    equivalents. 

Factual    Consid.gr.atar0-n s 

Even  though  the  legal  theories  upon  which  particular  cases 
have  been  brought  may  differ,  and  even  though  these  theories  may 
be  theoretically  quite  distinct,  courts  appear  to  utilize  a 
uniform  list  of  factors  in  their  analysis  of  failure  to  warn 
problems,  regardless  of  the  ground  upon  which  these  problems  are 
raised.  While  some  of  these  factors  are  common  to  other  types  of 
product  liability  cases--espec ially  design  cases--other s  are 
unique    to    failure    to    warn    situations. 

Most      courts    agree    that    the    seriousness   of   the    harm    which   may 

result    from    the    use    of   the    product    is    the    overriding      concern      in 

determining      whether      a      duty      to    warn    exists.       Thus,    the    dangers 

66 
which      are        involved         in         the         use        of        drugs,  dynamite 

paraphernalia,  and      certain      products    used    in    close    connection 

with   children,    such    as    vaporizers,         will    usually    require    that      a 

warning      be      given.         In      contrast,    where    the    degree    of    potential 

harm    is   not    so    great,      such      as      the      injury      which      befalls      the 

hypersensitive      user      of      hair      products,  a      warning      will      be 

required    less   often.       However,    courts   generally   require    that      the 


11-15 


serious  nature  of  the  potential  harm  be  foreseeable  before  they 
will  insist  on  a  warning.  Usually,  this  is  considered  a  matter 
for  the  jury  to  decide.  This  creates  almost  total  uncertainty 
for  a  manufacturer.  Our  legal  contractor  found  only  one  major 
decision  where  a  court  has  held  that  an  injury  which  results  from 
an  unintended  use  is  unforeseeable  as  a  matter  of  law. 

The  probability  of  the  harm  which  may  result  from  the  use  of 
the  product  is  another  factor  considered  by  courts  in  determining 
whether  an  adequate  warning  has  been  given.  Generally,  if  the 
probability  of  harm  is  small,  the  duty  to  warn  will  be  held  to 
exist  only  with  respect  to  the  most  serious  harms.  The  concept 
of  "probability  of  harm"  may  have  a  different  meaning,  however, 
depending  on  the  factual  situation  to  which  it  is  being  applied. 
On  the  one  hand,  courts  use  the  concept  to  describe  the 
probability  that  a  user  will  suffer  injury  in  the  absence  of  the 
warning.  This  application  includes  cases  where  the  warning 
concerns  the  allergenic  properties  of  the  product,  as  well  as 
those  where  dangers  result  from  imiproper  use  of  the  product. 
Clearly  in  these  cases,  the  provision  of  the  warning  will  be 
instrumental  in  reducing  the  probability  of  injury  in  the  use  of 
the  product. 

On  the  other  hand,  courts  also  consider  the  probability  of 
injury  in  the  use  of  the  product,  irrespective  of  whether  the 
warning  is  given.  Cases  in  which  this  probability  has  been 
considered  include  those  involving  the  polio  vaccine,  as  well 
as  those  which  deal  with  warnings  as  to  idiosyncratic  allergic 
reactions  from  the  product,  where  the  user  has  no  way  of 
determining  his  hypersensitivity  prior  to  exposure  to  the 
product.  The  probability  of  harm  is  significant  in  this  group 
of  cases,  not  because  the  warning  will  reduce  the  number  of 
injuries,  but  because  it  is  felt  that  users  of  the  product  should 
have  the  opportunity  to  weigh  for  themselves  the  risks  inherent 
in  the  use  of  the  product  against  the  benefits  to  be  obtained 
from  the  product. 

A  corollary  to  the  probability  of  harm  factor  is  the  user's 
knowledge  of  the  harm  which  may  result  from  the  use  of  a  product. 
Some  courts  hold  that  there  is  no  duty  to  warn  of  dangers  which 
are  obvious.  Almost  all  courts  agree,  on  the  other  hand,  that 
there   is   no  duty  to  warn  where  the  danger  is  generally  known. 


11-16 


Under  comment  j  to  Section  402A,  strict  liability  will  not  be 
imposed  where  the  danger  or  potential  for  danger  is  "generally 
known  and  recognized." 

The  situation  sometimes  arises  where  the  general  danger  of  a 
product  is  obvious  or  generally  known  but  the  specific  danger  is 
not  so  apparent.  In  this  type  of  case  courts  seem  to  use  two 
approaches.  Some  courts  merely  state  that  the  "obviousness"  of  a 
danger  refers  to  the  specific  risk  which  resulted  in  the  injury 
which  occurred  . 


Other  courts  use  a  foreseeabil ity  standard,  holding  that  if 
it  is  foreseeable  that  a  person  would  not  appreciate  the  risk 
involved  in  a  product's  use,  then  its  danger  was  not  an  obvious 
one.  Under  either  standard,  the  issue  gf  the  obviousness  of 
the  danger  is  generally  sent  to  the  jury. 


Foreseeab il i ty  of  misuse  is  a  very  elastic  concept  and  courts 
may  use  a  bit  of  "hindsight"  in  some  cases.  Thus,  one  court  has 
held  that  it  was  foreseeable  that  a  person  would  pour  alcohol- 
based  perfume  onto  a  candle  in  order  to  scent  it,  and  therefore 
held  the  manufacturer  liable  for  failing  to  warn  of  the  perfume's 
flammability  .  Nevertheless,  the  manufacturer  could  show  that 
nothing  similar  had  occurred  in  over  twenty-five  years  the 
product  had  been  on  the  market.  Other  courts  take  a  more 
restrictive  view  of  foreseeab il ity ,  and  might  have  held  for  the 
manufacturer  in  that  case. 


-^iC 


Another  recurring  issue  in  duty  to  warn  cases  is  the  matter 
of  to  whom  the  warning  must  be  given.  Under  the  Restatement ,  a 
manufacturer  will  be  liable  to  users  of  his  product,  even  though 
they  obtained  the  product  through  third  parties.  This  rule  is 
applicable  under  either  a  negligence  or  a  strict  liability 
theory  of  recovery.  The  question  often  arises  whether  a  warning 
to  the  third  party  of  the  product's  dangers  is  sufficient  to 
discharge  the  manufacturer's  duty  to  the  user.  To  answer  this 
question,  it  becomes  essential  to  identify  the  "position  of  the 
supplier    in    the    distributive    structure." 

Generally,  where  a  manufacturer  sells  its  product  in  bulk  to 
a  distributor,  who  then  packages  the  article  for  retail  sales, 
the      manufacturer      will      discharge    its   duty    with    a    warning    to    the 


11-17 


distributor.  The  distributor  will  then  be  reasonably  expected  to 
pass    the    warning    on    to    the    ultimate    purchaser    or    user.  So    also 

will  the  duty  be  discharged  by  a  warning  to  a  purchaser  who  is  a 
professional  under  whom  the  ultimate  user  will  work. 
Similarly,  it  is  well  settled  that  the  duty  to  warn  users  of 
prescription  drugs  is  normally  fulfilled  by  the  manufacturer's 
communication  to  the  prescribing  physician  by  way  of  package 
inserts,      letters,         and    occasionally   detail    men.  However,    the 

rule  is  not  absolute,  and  where,  for  example,  the  widespread 
distribution  of  a  defendant's  oral  polio  vaccine  was  through  mass 
clinics,  it  was  held  that  the  warning  must  be  given  in 
advertising    which    would    reach    the    potential    users   directly. 

While  most  of  the  factors  that  courts  consider  in  evaluating 
the  scope  and  discharge  of  the  duty  to  warn  are  grounded  in  the 
nature  of  the  product  itself,  courts  sometimes  also  look  to  other 
statements  made  by  sellers  about  their  product.  Courts  will 
frequently  find,  for  example,  that  there  is  a  higher  standard  by 
which  to  judge  the  duty  to  warn  where  the  manufacturer  has  made 
representations      of   the    safety   of    its    product.  Section    402B   of 

the  Restatement  (Second )  of  Torts  holds  the  manufacturer  strictly 
liable  for  the  misrepresentation  where  the  consumer  has 
justifiably  relied  on  it,  even  though  the  manufacturer  was  not 
negligent.  Thus,         it      has      been      held      that,      even      though      a 

plaintiff's  idiosyncratic  addiction  to  defendant's  drug  could  not 
possibly  have  been  foreseen,  the  manufacturer,  by  representing 
the  drug  as  nopadd ic tive ,  could  nevertheless  be  held  liable  under 
Section    402B. 

Conclusion 

Despite  the  growing  reliance  on  the  failure  to  warn  as  a 
basis  for  imposing  liability  on  manufacturers  for  injuries  which 
result  from  the  use  of  their  products,  confusion  still  reigns  as 
to  the  theoretical  basis  of  this  liability.  While  courts  attempt 
to  distinguish  liability  based  on  negligence  from  strict 
liability  in  the  failure  to  warn  area,  the  factors  at  play  under 
either  theory  remain  the  same.  Thus,  the  more  serious  the  harm, 
the  greater  the  probability  of  the  harm  and  the  less  obvious  the 
danger,  the  greater  the  likelihood  that  courts  will  require  the 
manufacturer  to  warn  of  the  hazards  involved  in  the  use  of  his 
product . 


11-18 


But  there  can  be  little  doubt  that  strict  liability  has  given 
courts  latitude  to  shift  the  balance  among  these  factors  and 
occasionally  allow  juries  to  reach  decisions  that  can  be 
justified  only  by  the  application  of  hindsight.  Remedial 
proposals  that  address  this  problem  are  discussed  in  Chapter  VII 
of  this  report. 

How  Does  the  Conduct  of  the  Product  User  or  Consumer 

Affect  His  Claim? 


Introduction 

Product  liability  actions  which  are  based  on  negligence  have 
traditionally  been  subject  to  the  defenses  of  assumption  of  risk 
and  contributory  negligence.  These  types  of  conduct  are 
generally  treated  as  affirmative  defenses,  and  the  burden  of 
establishing  them  rests  with  the  defendant.  The  distinction 
between  the  two  is  that  assumption  of  risk  concerns  knowledge  of 
the  danger  and  acquiescence  in  it,  while  contributory  negligence 
involves  a  departure  from  the  standard  of  conduct  of  a  reasonable 
person . 

As   has   been   indicated  in  the  previous  section,  it  has  been 

held  that  a  manufacturer  may  be  relieved  of  liability  for   injury 

caused   by   a   dangerous   product   if  the  danger  it  presented  was 

patent   or  ^obvious,   or   should   have   been   obvious,    to    the 

98 
plaintiff.     The   rationale  for  the  patent  danger  rule  is  that  a 

manufacturer  is  under  no  duty  to   guard   against   injury   from   a 

source  which  is  manifestly  dangerous.   Because  a  determination  of 

the  question  of  duty  is  usually  a  matter  for   the   court,   rather 

than   the  jury,  a  finding  that  the  defect  was  an  obvious  one  will 

usually  result  in  a  directed  verdict  for  the  defendant.   Not   all 

jurisdictions   recognize   the   patent   danger   rule,   and  a  trend 

toward  its  abolition  may  be  indicated  by  its  abandonment   in   New 

York,  a  jurisdiction  which  was  formerly  a  leading  exponent  of  the 

r  ule  . 

Another  situation  in  which  the  defendant  in  a  negligence- 
based  product  action  may  be  excused  is  where  the  plaintiff  has 
used  the  product  in  a  manner  which  was  unintended  by  the 
manufacturer.  This  type  of  conduct  is  usually  characterized  as 
misuse  or  abnormal  use. 


11-19 


With  the  widespread  acceptance  of  strict  liability  as  a 
theory  of  recovery  for  injuries  caused  by  defective  products, 
interest  has  focused  on  how  a  plaintiff's  conduct  will  affect  an 
action  brought  under  that  theory.  Section  402A  of  the 
Restatement  (Second )  of  Torts ,  which  many  courts  accept  as  the 
basis  for  strict  liability,  considers  defenses  based  on  the 
plaintiff's  conduct  in  Comment  n.  The  Restatement  position  is 
that  assumption  of  risk  on  the  part  of  the  plaintiff  is  a  good 
defense  in  a  strict  liability  action.  However,  conventional 
contributory  negligence,  in  the  sense  of  a  failure  to  discover 
the  danger  presented  by  a  product,  or  a  failure  to  avoid  injury 
by    the    product,    is    not   considered    a   defense. 

In  addition,  the  defense  of  misuse  of  the  product  is 
recognized  in  Comment  h  to  Section  402A.  Misuse  of  a  product 
defeats  the  plaintiff's  contention  that  a  product  was  defective, 
or  that  the  alleged  defect  caused  the  plaintiff's  injury.  Since 
these  are  elements  of  the  plaintiff's  case,  misuse  is  not  usually 
regarded  as  an  affirmative  defense.  The  existence  of  misuse 
merely    rebuts    an    essential    element   of   the    plaintiff's   case. 

The      patent      danger      rule      has      also  been      applied    to    strict 

liability    actions.              In    some    instances,  it      has      been      applied 

where      the      plaintiff's      conduct      amounts  to    nothing   more    than    a 

negligent    failure    to    discover    a   defective  condition. 

A  recent  development  with  which  courts  have  been  faced  is 
whether  the  concept  of  comparative  fault  should  be  applied  in 
considering      the    plaintiff's   conduct    in    strict   liability   actions. 

Assumption    of    Risk 


The      elements   of   the    defense    of   assumption    of   risk,    as    stated 

in    Comment    n,    are    knowledge      of      the      danger      or      defect,      and      a 

102 
voluntary   and   unreasonable   encounter   of  it.      The  plaintiff 


must  have  actual  knowledge  of  the  particular  risk 
assumption 


m 


1 


der      for 
Stated 


of  risk  to  constitute  a  valid  defense. 
otherwise,  assumption  of  risk  requires  a  subjective  realization 
by  the  plaintiff  of  the  danger  presented  by  a  product.  A 
plaintiff  may  not  be  barred  from  recovery  merely  because 
circumstances      should    have    put    him    on    notice    that    the    product    was 


11-20 


dangerous.   Nevertheless,  actual  knowledge  may  be   inferred   fro 
the  circumstances  of  the  case. 


m 


There  is  currently  a  split  of  authority  between  jurisdictions 
as  to  exactly  what  knowledge  or  type  of  knowledge  on  the  part  of 
a  plaintiff  is  required  to  establish  assumption  of  risk.  Some 
courts  seem  to  require  that  a  plaintiff  must  be  aware  of  the 
specific  defect  which  threatens  him  with  danger.  Thus,  in  a 
recent  Pennsylvania  case  involving  a  helicopter  crash  due  to  an 
alleged  defect  in  design,  it  was  said  that  a  plaintiff  "is 
precluded  from  recovery  only  if  he  knows  of  the  specific  defect 
eventually  causing  his  injury  and  voluntarily  proceeds  to  use  the 
product  with  knowledge  of  the  danger  caused  by  the  defect." 

In  apparent  opposition  to  the  decisions  which  hold  that 
knowledge  of  the  specific  defect  is  necessary  for  assumption  of 
risk  are  those  which  deem  the  knowledge  requirement  satisfied  by 
a  generalized  knowledge  of  the  danger  encountered  without 
reference  to  the  specific  defect.  For  example,  where  the 
plaintiff's  decedent  was  working  under  the  bed  of  a  dump  truck,  a 
knowledge  of  the  danger  of  his  position,  but  not  of  the  alleged 
design  defect  which  caused  the  bed  to  fall,  was  held  to  be 
sufficient  to  satisfy  the  knowledge  requirement. 

Courts  will  consider  factors  such  as  age,  experience,  and 
surrounding  circumstances  in  evaluating  a  plaintiff's  knowledge 
of  a  defect.  Thus,  a  carpenter  who  was  struck  in  the  eye  by  a 
nail  which  shattered  when  he  hammered  was  found  not  to  have 
assumed  the  risk  even  though  he  continued  to  use  the  nails  after 
the  heads  of  several  of  them  had  broken  off.  In  affirming  a  jury 
verdict  for  the  plaintiff,  the  court  noted  that  he  was  only  19 
years  old  and  had  only  been  working  for  a  short  period  of 
time . 

The  obviousness  of  danger  in  the  product  may  be  a  highly 
relevant  factor  in  determining  whether  a  plaintiff  has  sufficient 
knowledge  to  assume  the  risk.  However,  cases  dealing  with 
obvious  dangers  in  connection  with  assumption  of  the  risk  should 
be  distinguished  from  those  decisions  in  which  the  patent  danger 
rule  is  applied  in  finding  no  design  defect.  Pennsylvania,  for 
example,  does  not  recognize  the  patent  danger  rule,  but  a 
Pennsylvania  decision  has  held  a  manufacturer  not   liable,   as   a 


11-21 


matter      of      law,      where      the    plaintiff    was    injured    while   reaching 
into    a   glass-breaking   machine    to    prevent    it    from    jamming.  The 

court      emphasized      the      deliberate      and      voluntary      nature    of   the 
plaintiff's   action. 

Warnings  or  specific  directions  concerning  the  avoidance  of 
the  danger  posed  by  a  product  are  also  relevant  in  determining 
whether  the  plaintiff  had  the  requisite  knowledge  for  assumption 
of  risk.  For  instance,  where  a  plaintiff  had  been  provided  with 
the  manufacturer's  instructions  as  to  the  proper  tire  size  and 
air  pressure  for  his  vehicle,  his  action  in  disregarding  those 
instructions  was  the  basis  for  barring  his  recovery  under  the 
doctrine    of   assumption   of   risk. 

The      second      element      of      the      assumption      of   risk   defense    in 

strict    liability    actions    is    the    voluntariness   of   the      plaintiff's 

action      in      encountering      the      danger      presented    by    the   defective 

product.       In    evaluating      the      voluntariness      of      the      plaintiff's 

encounter    of   the    risk,    some   decisions    take    into    consideration    the 

fact    that    the    plaintiff      was      required      to      make      a      split-second 

decision.         For      example,      where    the    plaintiff's   defective   brakes 

had    failed    and    he    was    required    to    decide    whether    to    turn      into      a 

gas      station      wall    or    to    continue    along    the    highway,    his   decision 

to    turn    into    the   gas    station    wall    was    held,    as    a   matter      of      law, 

not      to      be      assumption      of      risk      because      the      decision    was   not 

1  1  T 
"voluntary."  Similarly,      the      Supreme      Court      of      Texas      has 

observed    that    "a   negligent    failure    to    choose    the   best    escape    from 

the    throes   of      peril      is      not      a      voluntary      encounter      with      the 

danger."  It      has      also    been    recognized    that    in    an    employment 

situation,    the    economic    pressure   on    an      employee      assigned      to      a 

dangerous    machine   may   negate    the    element   of   voluntariness. 

Comment  n  to  Section  402A  introduces  the  element  of 
reasonableness  to  the  defense  of  assumption  of  risk  as  it  applies 
to  strict  liability  actions.  In  the  conventional  application  of 
the  defense,  its  submission  to  the  jury  is  on  a  subjective  basis, 
since  it  requires  the  jury  to  find  that  a  plaintiff  knowingly  and 
willfully  assumed  the  risk.  The  plaintiff's  claim  is  only  barred 
if   he    was    unreasonable    in    assuming    the    risk. 

Although  many  jurisdictions  have  expressly  adopted  Comment  n, 
only    a    handful    of   decisions   have    explored    the    impact   of      applying 


11-22 


reasonableness  in  evaluating  assumption  of  risk.  In  discussing 
the  proper  approach  to  the  issue,  the  Supreme  Court  of  Oregon  has 
r ecen tl y  stated  : 

It  should  be  emphasized  that  this  element  of 
unreasonableness  pertains  only  to  the  nature  of 
plaintiff's  decision  to  encounter  the  known  danger.  We 
are  not  concerned  with  the  apparent  reasonableness  or 
unreasonableness  of  the  physical  conduct  through  which 
plaintiff  encountered  the  danger,  but  rather  the 
reasonableness  of  his  decision  to  do  so.  This 
distinction,  while  seemingly  theoretical,  is 
signi  f leant . 


on 


the  other  hand,  has  specifically  rejected 
Comment  n  to  Section  402A  insofar  as  it  advocates  the  concept  ,of 


One   Texas   court, 
m t  n  to  Secti 
reasonableness  as  a  criterion  in  judging  assumption  of  risk 


Misuse 

That  conduct  on  the  part  of  the  plaintiff  which  the  courts 
categorize  as  "misuse"  differs  significantly  from  assumption  of 
risk.  Comment  h  to  Section  402A  recognizes  that  an  abnormal  use 
or  misuse  of  a  product  may  defeat  a  claim  that  an  injury  was 
caused  by  the  defective  or  unreasonably  dangerous  condition  of 
the  product.  Causality,  of  course,  is  a  necessary  element  of  the 
plaintiff's  case.  For  example,  a  plaintiff  who  suffered  a  fall 
from  an  allegedly  defective  ladder  is  required  to  show  that  the 
ladder  was  being  used  in  a  normal  fashion  in  order  to  recover. 
In  another  case,  the  manufacturer  prevailed  on  the  causation 
issue  where  a  metal  pin  inserted  in  the  plaintiff's  leg  broke 
when  the  plaintiff  tried  to  walk  on  it  against  the  specific 
instructions   of   his   doctor. 

Misuse  by  the  plaintiff  may  indicate  the  absence  of  a  defect, 
as  wel  1  _as  lack  of  causationl^i  In  a  case  where  the  plaintiff 
disregarded  a  warning  not  to  use  a  grinding  wheel  above  certain 
speeds,  for  example,  his  action  for  damages  was  defeated  because 
he      failed      to    prove    that    the    wheel    was    defective.  Alteration 

of  a  product  may  also  constitute  misuse.  When  the  plaintiff 
nailed  wooden  strips  to  the  bottom  of  a  ladder,  the  ladder  was 
found    not   defective    and    recovery    was    barred. 


11-23 


In  the  situation  where  the  plaintiff's  misuse  and  the 
defective  condition  of  a  product  combine  to  cause  the  injury,  the 
plaintiff  will  be  allowed  to  recover.  In  a  Texas  case  where  the 
jury  found  that  the  plaintiff  was  negligent  in  his  use  of  the 
product  and  also  that  the  product  was  defectively  designed,  it 
was    held    that    recovery    would    be   barred    only      if      the      plaintiff's 


misuse  had  been  the  sole  cause  of  his  injuries 


12 


V 


The  test  for  establishing  whether  a  plaintiff's  conduct  in 
relation  to  a  product  should  bar  his  recovery  is  whether  the 
plaintiff's  manner  of  use  was  foreseeable.  Foreseeabil ity  seems 
firmly  accepted  as  the  preferred  standard  for  evaluating  the 
legal  consequences  of  a  plaintiff's  conduct  because  of  the  broad 
protection  which  it  affords  plaintiffs  in  comparison  with  other 
standards.  Occasional      decisions,    however,    apply   a    narrower, 

intended  use  test.  The  major  distinction  between  foreseeabil ity 
and  intended  use  is  the  difference  between  an  objective  and 
subjective    standard    in    evaluating    the    use    of   a    product.  In    the 

automobile-crashworthiness  cases  where  a  defective  or  dangerous 
condition  results  in  enhanced  injuries,  although  it  was  not  the 
cause  of  the  accident,  the  application  of  an  intended  use 
standard  will  result  in  a  dismissal  of  the  plaintiff's  case: 
accidents      are      not    the    intended    use    of   an    automobile.  On    the 

other  hand,  accidents  are  an  easily  foreseeable  occurrence,  and 
application  of  a  foreseeabil ity  standard  will  allow  recovery  for 
injuries    enhanced    by   a    dangerous    design. 


A  number  of  factors  are  r 
particular  use  of  a  product  is  fo 
the  gravity  of  the  potential  harm 
and  guarding  against  a  dangerou 
frequency  or  unusual  nature  o 
considered  relevant  as  to  whether 
be  barred.  Some  decisions  appear 
manufacturers.  For  example,  one 
order  to  constitute  a  bar,  the  a 
as  to  eliminate  any  need  of  the  d 
Other  courts  will  look  to  the  ac 
only    impose    liability    if    it    was    1 


elevant    in    determining    whether    a 

reseeable.       Some   courts      compare 

with    the    expense    of  discovering 

s      use      of      a      product.  The 

f      a      particular    use   may    also    be 

a    plaintiff's      recovery      should 

to    place    a    very   great   burden    on 

court      has      indicated      that      in 

lleged    misuse   must   be    so    unusual 

efendant      to      anticipate      it. 

tual    frequency   of   the   misuse    and 

ikely    to    occur  . 


Finally,       it      should      be   noted    that    there    is   confusion    in    the 
case    law   as    to    whether    a    plaintiff's    foreseeable,      but      careless. 


11-24 


use  of  a  product  will  bar  recovery.  For  example,  in  some 
situations  a  manufacturer  might  be  able  to  foresee  that  a  product 
user  will  remove  a  safety  device  on  a  machine  or  fail  to  heed  a 
warning.  This  is  one  more  area  where  it  is  extremely  difficult 
for  a  manufacturer  to  predict  his  basic  responsibility  for 
injuries  caused  by  his  products. 


Contributory  Negligence 

Unlike  misuse,  there  is  no  question  but  that  contributory 
negligence  is  an  affirmative  defense.  Comment  n  to  Section  M02A, 
however,  does  not  recognize  the  applicability  of  contributory 
negligence  in  its  conventional  form  in  strict  liability  actions. 
Thus,  the  negligent  failure  to  discover  a  defective  condition  or 
failure  to  use  reasonable  care  to  avert  injury  after  such 
discovery  will  not  bar  recovery.  However,  to  the  extent  that  a 
plaintiff  proceeds  negligently  in  the  face  of  a  known  danger,  his 
conduct  will  be  covered  by  the  defense  of  assumption  of  risk. 

Only  three  jurisdictions  expressly  reject  the  Restatement 
view  that  failure  to  discover  a  defect  or  avoid  injury  may 
constitute  contributgrv  negligence.  The  New  York  Court  of  Appeals 
in  Codl ing  v.  Paglia  held  that  plaintiffs  in  strict  liability 
actions  were  required  to  have  exercised  that  degree  of  care  for 
their  own  safety  that  a  reasonably  prudent  person  would  have 
exercised  under  the  same  circumstances.  Nevertheless, 
contributory  negligence  which  plays  a  minor  role  in  causing  an 
accident  will  not  bar  recovery.  The  plaintiff's  negligence  must 
be  a  substantial  factor  in  bringing  about  his  injury. 

In  a  later  decision,  New  York  abolished  the  patent  danger 
rule,  which  formerly  would  have  defeated  the  plaintiff's 
action.  However,  it  was  noted  that  the  obviousness  or 
openness  of  the  danger  is  available  as  a  defense  to  the  defendant 
on  the  issue  of  whether  the  plaintiff  had  exercised  the 
reasonable  care  required  to  protect  himself  under  the 
circumstances. 

132  133 

New   Hampshire     and   Wisconsin     have  also  recognized  the 

applicability  of  conventional  contributory  negligence   to   strict 

liability   actions.    In  both  jurisdictions,  this  result  has  been 

tempered  by  the  application  of  comparative  fault  principles. 


11-25 


Comparative  Fault 

The  application  of  comparative  fault  principles  to  actions  in 
strict  liability  is  regarded  as  having  great  potential  for 
relieving  some  of  the  inequities  incurred  by  both  plaintiffs  and 
defendants  as  a  result  of  the  "all  or  nothing"  approach  to 
recovery  presently  in  use.  A  number  of  jurisdictions  now  have 
decisions  in  which  the  relationship  between  comparative  fault  and 
strict  product  liability  is  considered. 


Wisconsin  is  the  jurisdiction  with  the  most  experience  in 
this  area.  Its  initial  decision  to  adopt  strict  liability 
indicated  that  no  distinction  would  be  made  between  contributory 
negligence  in  its  conventional  form,  and  assumption  of  risk,  in 
the  application  of  Wisconsin's  comparative  negligence  statute. 
The  Wisconsin  court  also  indicated  that  misuse  of  a  product  might 
relieve  or  limit  liability.  The  rationale  of  the  Wisconsin 
approach  of  applying  comparative  fault  in  strict  liability  cases 
was  that  the  latter  merely  amounted  to  negligence  per  se ,  to 
which  the  plaintiff's  fault  could  be  compared.  Thus,  the  court 
reasoned  that  the  defective  nature  of  a  product  could,  as  a 
causal  factor  of  an  injury,  be  compared  with  the  causal 
contributory  negligence  of  the  plaintiff.  Other  courts,  in 
applying  comparative  fault  principles  to  strict  liability 
actions,   have  simply  concluded  that  such  actions  are  imbedded  in 


the  concept  of  fault. 


In  contrast  to  the  Wisconsin  approach  to  comparative  fault,  a 
more  limited  approach  has  been  adopted  in  Florida,  where 
apportionment  of  fault  in  strict  liability  actions  is  restricted 
to  assumption  of  risk,  and  the  failure  to  exercise  due  care  for 
one's  safety  after  the  discovery  of  the  product's  dangerous 
condition.  Oklahoma    has      said      that      applying      a      comparative 

negligence  statute  to  the  defense  of  assumption  of  risk  in  a 
products  case  is  forbidden  because  of  specific  statutory  language 
limiting  apportionment  to  situations  where  the  plaintiff's 
conduct    was    formerly   classified    as   contributory   negligence. 


A  recent  V/isconsin  decision  has  indicated  that  foreseeable 
misuse  of  a  product  by  a  plaintiff  would  limit  his  recovery  under 
the      comparative    fault    approach,    while    unforeseeable   misuse    would 


bar  recovery  completely. 


Different  reasoning  has  been   adopted 


11-26 


139 
by      a      Federal      District      Court      sitting      in    Idaho.  The    court 

concluded    that    the    rationale   of      Idaho's      comparative      negligence 

statute      required      a      comparison      of      all      legal      causes      of      the 

plaintiff's    injuries.      This    led    the    court    to    reject    the      argument 

that      unforeseeable      misuse    would    constitute    an    absolute    defense. 

Accordingly,    both    foreseeable    and    unforeseeable   misuse    are      taken 

into    account    in    the    apportionment   of   damages. 


A  growing  number  of  jurisdictions  have  expressed  approval  of 
the  concept  of  applying  comparative  fault  concepts  to  strict 
liability      actions,  even    though    strict    liability   applies    where 

all  possible  care  was  exercised  in  the  preparation  of  the 
product.  Legal  commentators  have  also  pointed  out  the  advantages 
to    be   derived    from    apportioning    damages   on    the    basis   of    fault      in 


iS 


Only   one  jurisdiction  has  departed 


strict  1 iabil ity  cases 
from  this  trend.  Thus,  it  seems  safe  to  say  that,  although  it 
entails  certain  conceptual  problems,  the  approach  of  applying 
comparative  fault  principles  to  strict  liability  actions  will  be 
increasingly  utilized  in  order  to  overcome  the  inequities 
currently  involved  in  application  of  the  "all  or  nothing" 
approach.  This  trend  may  be  accelerated  by  the  National 
Conference  of  Commissioners  on  Uniform  State  Laws'  recent 
approval  of  a  model  Comparative  Fault  statute.  The  law 
encompasses  both  negligence  and  strict  liability  actions. 
Nevertheless,  it  would  seem  that  for  the  foreseeable  future 
uncertainty  and  variety  of  results  will  be  part  of  state  tort  law 
on  the  subject  of  plaintiffs'  conduct  in  product  liability 
actions.  Chapter  VII  discusses  and  evaluates  remedial  proposals 
that  could  improve  this  situation. 


A  Product  Liability  Defendant's  Right  to  Shift 
the  Cost  of  Accidents  Onto  Others. 

Introduction 

There  are  two  basic  ways  a  defendant  can  shift  the  cost  of  an 
accident  on  to  a  party  other  than  the  plaintiff:  by  an  action  in 
indemnity  or  a  claim  for  contribution.  Indemnity  is  usually  the 
recovery  of  the  full  amount  of  one's  liability  from  a  third 
party.  Usually,  awards  of  indemnity  are  based  on  one  of  three 
basic    theories: 


11-27 


One  involves  the  concept  of  different  qualities  of 
negligence;  another  involves  a  breach  of  duty  as  between 
tortfeasors;  the  third  gives  indemnity  to  the  tortfeasor 
who  is  vicariously  liable  by  operation  of  law. 

The  courts  of  Illinois     and  the  Tenth  Circuit  Court  of  Appeals, 

145 
in  interpreting  Kansas  law,     have  decided  that   a   manufacturer 

who   is   held   strictly   liable  in  a  products  case  cannot  recover 

indemnity  from   a   purchaser.    Other   state   courts   allow   such 

claims . 

Contribution  is  the  recovery  of  part  of  the  loss  from  a  third 
party.  The  loss  is  divided  (or  apportioned  on  the  basis  of 
fault)  among  those  responsible.  The  essence  of  contribution  is 
the  existence  of  joint  liability: 

[E]ven  though  there  may  have  been  no  concert  of  action 
between  the  appellees,  the  cumulative  effect  of  their 
several  acts  was  a  single,  indivisible  injury,  which 
probably  would  not  have  resulted  but  for  the  concurrence 
of  such  acts. 

Traditionally,  contribution  among  joint  tortfeasors  was  not 
allowed,  because  it  was  believed  that  the  courts  should  not  aid 
wrongdoers.  This  rule  has  been  changed  by  judicial  mandate  in 
nine  states,  and  by  statute  in  at  least  17  others.  To 
recover  contribution,  a  manufacturer  must  show  that  another  party 
was  at  fault.  This  is  a  distinctly  different  theory  from  that  of 
indemnity,  where  the  manufacturer  must  show  that  the  other 
party's  fault  was  both  greater  and  also  of  a  different  quality. 
It  may  also  conflict  with  the  policy  of  spreading  the  loss  which 
underlies  strict  liability.  Accordingly,  there  has  been  some 
difficulty  in  integrating  old  doctrines  with  strict  liability 
principles.  One  court  has  flatly  stated  that  there  is  no  right 
of  contribution  between  one  who  is  held  strictly  liable  and  one 
who  is  held  liable  on  a  traditional  negligence  theory.  Other 
courts  allow  such  claims. 

For  purposes  of  contribution  and  indemnity,  third  parties  may 
be  classed  as  (1)  ultimate  purchasers,  (2)  intermediaries,  such 
as  retailers  or  wholesalers,  and  (3)  co-manufacturers,  such  as 
assemblers   or    component    part   manufacturers. 


11-28 


Suits  Against  Ultimate  Purchasers 


Indemnity  is  rarely  obtained  from  ultimate  purchasers. 
Courts  sometimes  conclude  that  the  manufacturer  has  not  stated  a 
claim  for  indemnity,  but  only  a  defense  to  the  original 
lawsuit.  Although  indemnity  issues  regarding  the  quality  of 
the  conduct  traditionally  focus  on  active  and  passive  negligence, 
some  courts  have  considered  the  issue  in  terms  of  a  duty  owed  by 
the  user  to  the  manufacturer.  Where  the  user  or  owner  is  an 
ordinary  person  with  no  special  knowledge,  courts  have  found  that 
there  is  no  duty  owed  the  manufacturer  and,  therefore,  no  basis 
for  indemnity.  Where  the  user  is  engaged  in  a  trade  requiring 
special  knowledge,  however,  the  courts  are  more  likely  to  find 
that  he  owes  some  duty  to  the  manufacturer. 


Common    liability    is    a    prerequisite    for    recovering 

contribution.    A  manufacturer   cannot    recover    contribution, 

therefore,   from   one   who   could   not   be  liable  to  the  original 

plaintiff.   Thus,  those   who   are   immune   from   a   suit   by   the 

original   plain ti ff--such   as   spouses   and   employer s--are   also 

1  5^ 
protected  from  suits  for  contribution.       Spouses   are   usually 

protected   when   the   doctrine  of  interspousal  immunity  exists  in 

the  jurisdiction.      Far  more   important   in   product  liability 

law,   however,   is   the   immunity   of   employers,  based  on  Worker 

Compensation   laws.    Employers   are   thus   a   special  class   of 

ultimate  purchasers. 


Worker   Compensation  laws  have  been  interpreted  as  absolutely 

r 
1 


barring  recovery  of  contribution  from  employers  under  the  laws  of 


at   least   five   states. 


Several   courts  have  recognized  the 

15' 


resultant  burden   on   manuf ac tur er s^ ^but   have   stated   that   the 


solution  must  be  a  legislative  one.  The  consequences  are  that 
manufacturers  must  bear  losses  caused,  in  part,  by  the  negligence 
of  an  employer,  and  that  there  is  less  incentive  for  employers  to 
take  safety  precautions  or  warn  employers  of  the  hazards 
involved . 


Although   four   states 
does  not  bar  a  defendant's 


have   held  that  interspousal  immunity 
covery   of   contribution   from   the 
spouse   of   the   plaintiff,""'   Pennsylvania  is  the  only  state  to 
hold  that  a  defendant  may  recover  partial   contribution   from   an 


1 


employer   covered   by  the  Worker  Compensation  laws. 


Thi  s  rule 


11-29 


has  been  applied  even  where  the  manufacturer  is  strictly  liable 
and  the  employer  negligent.  An  approach  which  lies  between 
that  of  Pennsylvania  and  the  other  jurisdictions  is  to  allow 
contribution    where    the    employer    physically    altered   the 

product . 


The    Supreme    Court   of   Minnesota,    in    sounding    a    strong    response 

to    the    inequities   of   the      employer's      nonliability      under      Worker 

Compensation      laws,      has      held      that      the    bar    against    recovery   of 

1  62 
indemnity    is    unconstitutional: 


[N]o  legitimate        objective        is        fostered         by        an 

interpretation  of  the  workmen's  compensation  laws  to 
prevent  indemnification  to  a  third-party  tortfeasor  from 
a  negligent  employer.  With  this  in  mind,  there  may  be  a 
due  process  violation  when  the  third-party  tortfeasor's 
right  to  indemnity  is  extinguished  by  the  workmen's 
compensation  laws  without  providing  him  a  reasonable 
substitute    for    his    right. 

Suits    Against    Intermediaries 

When  a  manufacturer  seeks  indemnity  from  one  who  is  later  in 
the  stream  of  commerce,  but  who  is  not  the  final  purchaser--such 
as  a  distributor  or  retailer--courts  have  given  policy  reasons 
for  extending  product  liability  to  such  intermediaries.  This  is 
especially  true  when  the  court  has  already  said  that  a  basic  goal 
of  strict  liability  is  to  distribute  a  loss  among  those  best  able 
to    bear    it: 

Retailers  like  manufacturers  are  engaged  in  the  business 
of  distributing  goods  to  the  public.  They  are  an 
integral  part  of  the  overall  producing  and  marketing 
enterprise  that  should  bear  the  cost  of  injuries 
resulting  from  defective  products.  Strict  liability  on 
the  manufacturer  and  retailer  alike  affords  maximum 
protection  to  the  injured  plaintiff  and  works  no 
injustice  to  the  defendants,  for  they  can  adjust  the 
costs  of  such  protection  between  them  in  the  course  of 
their    continuing    business    relationship. 


11-30 


Such  an  approach,  however,  argues  for  an  apportionment  of  the 
loss,  and  not  a  complete  shifting  of  the  loss  as  occurs  with 
indemnity . 


The    unfairness    of   the   "all-or-nothing"   application   of 
indemnity  was  discussed  at  length   by   the   California   Appellate 


Court   in 
the  court 


Ford   Motor  Co ,  v.  Robert  J.  Poeschel,  Inc 


There  , 
against   a 


affirmed      dismissal      of      Ford's      complaint 
dealer,    but    discussed    at    length    its   desire    for    a    fairer    approach 


Judicially  favored  objectives  of  deterrence  and  accident 
prevention  would  be  promoted  by  imposing  some  liability 
on  a  dealer  who  knew  of  danger  and  did  nothing.  To 
shift  the  entire  loss  to  him  would  not  serve  these 
objectives,  for  then  the  manufacturer  would  escape  scot- 
free.  A  wise  rule  of  law--one  designed  to  stimulate 
responsibility  throughout  the  merchandising  chain--would 
require   both    parties    to    share    the    loss. 

While  rarely  discussing  such  policy  matters  directly,  most  courts 
are,  in  fact,  reluctant  to  award  a  manufacturer  indemnity  from  a 
later  intermediary,  such  as  a  distributor  or  retailer.  As  in  the 
cases  concerning  ultimate  purchasers,  courts  usually  base  their 
decisions  on  alleged  failures  to  state  a  claim,  the  active  and 
passive  negligence  distinction,  or  the  lack  of  a  duty  to  the 
manufacturer.  Courts  often  dismiss  claims  for  indemnity  against 
intermediaries,  for  example,  when  the  claims,  if  proven,  would  be 
a    complete    defense    to    the    original    action. 

Courts      more^^often      award      manufacturers      contribution      from 
168 
intermediaries.  Courts    are    normally   more    willing    to    divide   or 

apportion      the    loss   between   manufacturer    and    dealer    by    allowing    a 

contribution    claim    than    to    shift    the    entire    loss      to      the      dealer 

under    an    indemnity    theory. 

Suits    Against    Co-Manufacturers 

Courts  are  apparently  more  willing  to  allow  indemnity  claims 
against  those  earlier  in  the  stream  of  commerce  than  against 
those      who      are    later.  Even    here,    however,    the    application    of 

the    traditional    active    and    passive   rule    restricts    recovery,      when 


11-31 


placing   a  defective  product  in  the  stream  of  commerce  is  treated 
as  active  negligence,  precluding  recovery. 


Courts  al so ^ frequen tl y  consider  the  relative  knowledge  of  the 


two   parties, 
exper  ience 


1 


denying  indemnity  to  those  with  special 
characterizing  their  failure  to  act  as  active 
negligence.  ''~  This  same  tendency  is  evident  in  the  opinions 
that  speak  of  a  duty  to  inspect,  instead  of  distinguishing 
between  active  and  passive  negligence.  Some  courts  have  awarded 
indemnity  to  manufacturers  whose  original  liability  is  based  on  a 
failure  to  inspect  a  component  part.  Most  courts,  however, 
have  regarded  a  failure  to  inspect  as  active  negligence, 
especially   by   manufacturers    with    special    experience    and 


a   manufacturer   who  fails  to  inspect  a 
recover   indemnity   if   inspection   was 


knowledge.       However, 
component  part  may  still 

impractical  or  impossible.  ' "  Superior  knowledge  of  an  assembler 
may  also  relieve  a  component  part  manufacturer  of  a  duty  to  warn, 
shielding      it      from      a      claim    for    indemnity.  To    be    sure,    some 

courts  speak  of  "primary  and  secondary"  causes  instead  of  active 
and  passive  negligence  or  a  duty  to  inspect  component  parts. 
However,  the  results  under  the  two  analyses  are  much  the  same. 
The  advent  of  strict  liability  has  led  the  Illinois  courts  to 
abandon  entirely  notions  of  active  and  passive  negligence,  as 
well  as  primary  and  secondary  liability,  in  determining  indemnity 
among    co-manufacturers. 


Because  indemnity  actions  against  co-manufacturers  have  been 
relatively  successful,  compared  to  similar  actions  brought 
against  other  defendants,  the  number  of  contribution  actions 
against  co-manufacturers  has  been  fairly  small.  Typically,  when 
contribution  is  sought,  it  is  alleged  that  the  co-manufacturer 
supplied    a    faulty    component    part    to    the    primary   manufacturer. 

The    New    Doctrines   of    Comparative    Fault 

New  doctrines  distribute  the  loss  according  to  each 
defendant's  contribution  to  the  injury.  These  new  doctrines  have 
been  instituted  directly  by  statute,  indirectly  by  a  court 
opinion    expanding    existing    statutes,    or    by    judicial    decree. 

Uniform  Laws . — The  1939  version  of  the  Uniform  Contribution 
Among    Tortfeasors   Act    included       an      optional       provision      allowing 


11-32 


180 
apportionment   of   damages   according   to  the  degree  of  fault. 

The   provision   was   adopted   in   only   four   states:    Arkansas, 

Delaware,   Hawaii,   and  South  Dakota.      The  1955  version  of  the 

U. C. A. T.  reversed  on   this   point   and   explicitly   forbade   such 

apportionment.     There  are  not  enough  decisions  to  determine  the 

effect  of  the  1939  Act  in  the  four  states  which  adopted  it.     As 

has   been   indicated,  the  National  Conference  of  Commissioners  on 

Uniform  State  Laws  recently  adopted  a  Uniform   Comparative   Fault 

Act.    This  act  provides  that  responsibility  among  parties  should 

be  based  on  the  proportionate  fault  of  each.   The  Conference   has 

indicated   that   the   1955   version   of   the   U . C . A. T .   should  be 

modified  to  accord  with  the  new  Uniform  Comparative  Fault  Act   by 

any  state  that  adopts  the  comparative  fault  principle. 

Extend  ing   Comparative  Negligence  Statutes . --Some  states  have 

statutes   applying   comparative   negligence   to    suits    between 

plaintiffs  and  defendants.   The  statutes  do  not  explicitly  extend 

the   doctrine   to   suits   among   defendants   for    indemnity    or 

contribution.    However,   the  courts  of  Wisconsin     and  Maine 

have  extended  comparative  negligence  to  suits   among   defendants. 

In   contrast,   the   First  Circuit  Court  of  Appeals, has  refused  to 

186 
extend  New  Hampshire's  law  in  a  similar  fashion.    nJ'^^  Minnesota 

courts  have  not  yet  expanded  that  state's  statute,     although  at 

least  one  commentator  has  urged  them  to  do  so. 

189 
By   Judicial  Decree . — In  Dole  v.  Dow  Chemical  Co . ,     the  New 

York  Court   of   Appeals   adopted   a   rule   apportioning   damages, 

without  relying  on  a  comparative  negligence  statute: 

The  conclusion  reached  is  that  where  a  third  party  is 
found  to  have  been  responsible  for  a  part,  but  not  all, 
of  the  negligence  for  which  a  defendant  is  cast  in 
damages,  the  responsibility  for  that  part  is  recoverable 
by  the  prime  defendant  against  the  third  party.  To 
reach  that  end  there  must  necessarily  be  an 
apportionment  of  responsibility  in  negligence  between 
those  parties. 

Shortly  ^ ^thereafter ,    the   New   York   rule   was   enacted   as   a 
statute  . 


11-33 


In  the  four  years  since  the  rule  was  adopted,  the  New  York 
courts  have  had  time  to  develop  the  details  of  its  application. 
In  contrast  to  traditional  indemnity,  the  Dole  rule  allows  more 
than  one  defendant  in  the  chain  of  supply  to  be  found  liable  for 
contribution.  While  Dole  itself  involved  a  negligence  action, 
the  rule  was  quickly  applied  in  breach  of  warranty  actions 
involving  product  liability,  and  in  actions  between  one  liable 
for  negligence  and  another  liable  for  breach  of  warranty.  By 
statute,  a  settlement  and  release  from  the  original  plaintiff 
protects  a  defendant  from  a  later  suit  for  contribution  by 
another  defendant,  but  the  plaintiff's  claim  against  the 
remaining  defendants  is  reduced  by  the  amount  of  the 
settlement. 

In  practice,  when  the  Dole  rule  is  applied,  the  courts  appear 
reluctant  to  require  contribution  or  partial  indemnity  from 
ultimate  purchasers,  members  of  the  class  protected  by  product 
liability  law.  Thus,  the  courts  have  denied  manufacturers 
contribution  from  the  driver  of  a  car  or  the  dealer  who  repaired 
it,  AQ^^'^  from  the  parents  of  children  who  ate  paint  containing 
lead  . 

Whether  the  Dole  rule  will  be  applied  in  other  jurisdictions 
is  an  open  question.  The  Virgin  Islands  recently  followed  the 
approach  in  Dole  and  applied  comparative  negligence  to  the 
problem  of  apportioning  the  loss  among  defendants.  Florida 
and  California  have  also  adopted  comparative  negligence  by 
judicial  decree,  but  no  substantial  body  of  law  has  developed 
concerning  contribution  among  those  liable  for  a  defective 
product.  A  California  court  has  very  recently  held  that 
comparative  negligence  does  not  remove  the  employer's  immunity 
from  contribution  arising  out  of  the  Worker  Compensation  act. 
Illinois  has  adopted  a  rule  apportioning  damages  for  the 
aggravation  by  a  negligent  doctor  of  injuries  caused  by 
another.  One  commentator  suggests  this  case  provides  a  basis 
in  IllinQis  for  apportionment  of  damages  in  product  liability 
cases.  The  Federal  District  Court  in  Tennessee  has  recently 
applied  a  similar  approach  when  ruling  that  an  elevator 
manufacturer  could  not  recover  full  indemnity  but  was  entitled  to 
a  partial  recovery  from  a  components  manufacturer.  The  case 
did   not   involve   a  personal  injury,  but  the  standard  enunciated 


11-34 


could      readily      be      applied    to    a    product    liability   case    involvini 
personal    injury. 


On      the      other      hand,       at      least    „Qpe 
explicitly    rejected      the      Dole      rule. 


state,    New    Jersey,    has 
The      New      Jersey      case 


involved  a  claim  against  an  employer  for  contribution  and  the 
court  felt  it  would  be,  in  effect,  overruling  the  policy  of  the 
Worker    Compensation    act    if   contribution    were    allowed. 

In  sum,  the  rules  regarding  apportionment  of  damages  among 
defendants  vary  in  important  respects  and  are  in  a  state  of  flux. 
In  Chapter  VII,  Section  IV,  this  report  discusses  means  whereby 
uniformity  may  be  brought  into  the  system.  The  benefits  and 
shortcomings  of  a  variety  of  alternative  approaches  are  also 
presented  . 

Product    Liability    Law   in    the    Workplace--Have 

Courts    Developed    or    Have    Statutes    Required 

Different    Legal    Treatment    for    Work-Related    and 

Non-Work-Related    Injuries? 

Introd  uc tion 

Anecdotal  data  reaching  the  Task  Force  suggest  that  workplace 
injuries  are  an  important  and  special  part  of  the  product 
liability    problem. 

Preliminary  data  from  the  Insurance  Services  Offices  show 
that  a  substantial  amount  of  product  liability  damages  (in  terms 
of  relative  size  of  awards)  occur  in  workplace  injuries.  For 
that  reason,  it  seemed  useful  to  discuss  some  of  the  legal  rules 
that    surround    that    type    of    injury. 

Many  products  cases  involving  injuries  which  are  sustained  by 
employees  in  the  course  of  employment  present  issues  quite 
different  from  those  dealing  with  non-workplace  injuries. 
Several  factors  appear  to  induce  courts  to  apply  different  rules 
to  the  treatment  of  work-related  product  injuries  than  to  non- 
work-related  product  injuries.  These  factors  may  be  grouped  into 
two  broad  categories:  (1)  those  that  are  based  on  the  injured 
person's  status  as  a  worker  and  (2)  those  that  are  based  on  the 
existence      of      the      employer      as      one      who    intervenes   between    the 


11-35 


injured    worker      and       the      manufacturer      of      the      injury-producing 
produc  t . 

Status    as    an    Employee 


Persons  who  are  injured  at  work,  of  course,  are  normally 
covered  by  Worker  Compensation  statutes.  Under  this  system,  an 
employee  injured  in  the  course  of  employment  is  provided  benefits 
without    regard    to    fault.  The    injured      worker      is      entitled      to 

benefits  for  physical  injury  (including  wage  loss  and  medical 
expense    reimbursement)    or    death.  There    is      also      emerging      an 

increased  concern  that  the  injured  worker  be  rehabilitated, 
although  practical  implementation  of  such  measures  has  met  with 
difficulties.  Under        Worker         Compensation         systems,         a 

participating  employer  is  usually — but  not  al ways--protec ted  from 
suit      by    the    injured    worker.  Such    protection    is    not   generally 

extended  to  wrongdoers  other  than  the  employer,  since  the 
compensation  system  is  not  designed  to  extend  immunity  to  parties 
that   do    not   make    financial    contributions    to    it. 


Of      those      factors      associated    with    the    status    of   the    injured 

party    as    a    "worker,"    the   most    prevalent    is    his    experience,    either 

as      a      long-term    user    of   the    specific    article    which   caused    injury 

or,    more   generally,    as    a   member    of      a      particular      profession      or 

occupational    group.      "Experience"    has   been    a    determinative,    or    at 

least    an    influential,    factor    in    cases    involving    three      particular 

issues  common  to         product        liability        litigation:  the 

manufacturer's   duty      to      wa^rn      of      hazards      associated      with      the 

product,      the      manufacturer's   _djjty      to gtiard    against   nonobvious 

dangers,    and    the    establishment   of   the   defense      of      assumption      of 

the    risk.       In    respect    to    each   of   these    issues,    it   may   be    asserted 

that    the    injured    party's   experience    had    the    effect      of     making      a 

particular      hazard   more   obvious    to    him    than    it    would    have   been    to 

an       inexperienced      user      of      the      product,      thus        resulting         in 

imposition      of      different      standards      in      the      assessment      of   the 

actions      of      the      manufacturer      and      the      injured      party      in      the 

workplace      situation.         This    is    particularly   common    in    respect    to 

the    issue    of   a   manufacturer's      or      supplier's      duty      to      warn      of 

product      hazards.  It      has   been    held    that    there    is   no   duty   to 

212 
warn    a    worker    who    is      truly      experienced.  as      opposed      to      an 


actually    inexperienced    injured    employee 


^13 


11-36 


Where  a  dangerous  condition  is  equally  within  the  technical 
knowledge  of  the  supplier,  the  employer  and  the  experienced 
employees,  the  supplier  has  no  obligation  to  warn  of  dangers. 
Unusually  extensive  discussion  of  this  issue  was  provided  by  the 
Iowa    Supreme    Court    in    West    v.    Broderick    and    Bascom    Rope    Co. 


The  i  nj  ured  part  y's  work  experience  is  also__oftej2_  cited  as  a 
factor  in  determining  whether  the  warning  which  was  given  was,  in 
Tag^^  "atlequdt^":  The    courts  "often    hold    that,    while    therV~Ts"'a~ 

duty  to  warn  all  users  (even  workers),  the  adequacy  of  the 
warning  may  be  determined  in  light  of  the  professional  status  of 
the  trained  and  experienced  workers  who  are  expected  to  use  the 
product . 


The  experience  of  the  injured  worker  has  an  effect  on  a  cause 
of  action  based  on  a  manufacturer's  failure  to  warn  in  respect  to 
the  defense  of  contributory  negligence.  In  two  cases  where 
contributory  negligence  was  allowed  as  a  defense  to  a  claim  of 
negligent  failure  to  warn,  the  court  focused  upon  the  long 
professional  experience  of  each  of  the  plaintiffs  as  a  key  factor 
in  deciding  whether  each  had  knowledge  of  the  danger  from  an 
independent  source,  so  as  to  eliminate  failure  to  warn  as  a 
proximate      cause      of      the      harm.  In    addition,    experience    and 

expertise  have  been  cited  as  matters  requiring  different 
treatment  of  work-related  injury  claims  in  respect  to  the 
question  of  the  obligation  of  a  manufacturer  to  provide  safety 
guards . 


Most  interesting  in  respect  to  the  experience  factor  isa 
comparison  of  two  cases  in  which  the  injuries  involved  falls  from 
scaffolds  which  did  not  have  safety  rails.  Upon  the  same  facts, 
an  experienced  professional  painter  was  denied  recovery  under  New 
York  law  against  the  supplier  of  the  unguarded  scaffolding, 
while  an  inexperienced  volunteer  worker  was  permitted  to  proceed 
with  his  claim  against  the  lessor  of  the  scaffolding  under  Ij 
Minnesota    law. 


Plaintiffs'  counsels  have  argued  that  the  obvious  danger 
defense  ignores  a  basic  maxim  of  the  workplace  that  even  the  most 
experienced  worker  may  suffer  a  momentary  lapse  of  concentration 
which,  when  coupled  with  an  absence  of  safety  devices,  may  result 
in    severe    injury.       It    has    been    said    that: 


11-37 


Contributory  negligence  in  a  factory  setting  may  often 
be  just  the  statistically  inevitable  consequences  of  the 
performance  of  repetitive  mechanical  chores  in  a 
distracting  factory  environment.  Even  the  most  careful 
worker  will  make  an  occasional  mistake  which  may  result 
in  in j  ur y  . 


Increased  recognition  of  such  arguments  has  led  to  what  the 
Seventh  Circuit  Court  of  Appeals  sees  as  a  trend  away  from  the 
rule  that  there  i^^Qo  duty  to  guard  against  dangers  obvious  to 
experienced  workers.  In  fact,  the  case  most  often  cited  in 
support  of  that  rule,  Campo  v.  Scof ield ,  has_itself  been 
recently  overruled  by  the  New  York  Court  of  Appeals 


^2^ 


Another  factor  which  sets  an  injured  worker  apart  from  others 
who  are  harmed  by  products  is  that  the  actions  of  the  worker  are 
often  guided  by  safety  rules  established  either  by  statute  or 
informally  promulgated  by  his  employer.  The  effect  which  will  be 
given   to   a   showing   that   the   injured   worker   was   acting  in 


V  iolation  of  a 
j  ur  isd  ic tions . 


2; 


jgfety 


rule   when   injured   varies   in   different 


While  a  worker  might  be  at  a  disadvantage,  as  opposed  to 
nonworker  users,  in  that  he  is  presumed  to  have  the  benefit  of 
safety  instructions  to  guide  his  actions,  he  does  enjoy  the 
advantage  of  being  able  to  assert  usage  in  the  trade  to  support 
his  claim  that  he  did  not  himself  act  negligently.  It  has  been 
held  that  the  fact  that  an  injured  worker  was  following  customary 
practice  and  usage,  while  not  necessarily  absolving  him  of 
contributory  negligence,  is  relevant  to  the  jury's  consideration 
of  the  i ssue . 

In  terms  of  the  "status"  of  an  injured  worker  in  relation  to 
the  manufacturer,  it  has  been  held  that  a  simple  negligence  claim 
may  be  maintained  against  a  manufacturer  by  an  employee 
reasonably  expected  to  be  in  the  vicinity  of  the  probable  use  of 
the  product.  Moreover,  Comment  1  to  Section  402A  seems  to 
eliminate  any  doubts  regarding  the  necessity  of  a  privity 
requirement  in  strict  liability  suits  by  injured  workers. 
However,  in  Wir  th  v.  Clark  Equipment  Co . ,  the  Ninth  Circuit 
Court  of  Appeals,  applying  Oregon  law,  left  for  jury 
determination  the   question   whether   an   employee   who   was   not 


11-38 


actually      performing      his   duties    at    the    time    he    was  injured    was    a 

"user"      entitled      to      bring      suit      under      Section  402A        or         a 

"bystander,"  to  whom  Oregon  had  not  at  that  time  extended 
protection  . 

More  often,  however,  privity  problems  in  the  workplace  injury 
context  involve  claims  for  breach  of  warranty.  Some  courts  have 
permitted  injured  employees  to  base  their  claim  on  warranty 
despite    the    absence    of   privity   of   contract,  on      the      reasoning 

that  the  employee  of  the  purchaser  is  within  the  distributive 
chain  which  marks  the  parameter  of  a  manufacturer's  warranty 
liability,  or    that    implied    warranty    protection    extends    to    all 

those    who    are    reasonably   expected    to    use    the    product.  However, 

some  jurisdictions  do  require  a  showing  of  privity  to  support  a 
cause    of   action    based    on    breach   of      warranty,  and      refuse      to 

expand  horizontal  privity  to  include  employees  of  a  "buyer"  for 
purposes  of  providing  warrantv  protection  under  Section  2-318  of 
the    Uniform    Commercial    Code . 

Thus,      a      person      injured      by    a    product   may    find  himself    in    a 

different      litigational      position      when      he      was      an  employee-- 

particularly  an  experienced  one--rather  than  an  ordinary 
consumer  . 

Concept    of    Involuntary    Use    of    Product 

A  consideration  that  is  often  involved  in  the  discussion  of 
workplace  injuries  is  the  view  that  an  employee  is  less  able  to 
protect  himself  from  injury  caused  by  a  product  used  in  his 
employment  than  is  the  ordinary  user  of  products.  The  worker's 
method  of  operation,  use  of  safety  devices,  and  even  the  very 
basic  decision  to  use  the  machine,  tool,  or  substance  which 
eventually  injures  him  are  matters  dictated  by  his  employer.  His 
actions  are  always  governed,  to  some  degree,  by  the  fact  that  his 
livelihood  depends  upon  his  ability  to  please  an  employer,  who  is 
naturally  interested  in  productivity  and  speed.  This  factor  is 
often  cited  by  counsel  for  injured  workers  in  an  attempt  to  avoid 
the  contributory  negligence  and  assumption  of  risk  defenses. 
This  matter  of  "economic  compulsion"  has  been  discussed  in  a 
number  of  decisions,  and  it  appears  that  many  courts  have  given 
recognition  to  the  precept  that,  where  a  person  must  work  in  a 
place   of   danger    and    give    full    attention    to    his    work,    his      conduct 


11-39 


may  be  judged  less  harshly  than  that  of  one  who  is  using  a 
product  in  a  less  inhibiting  situation.  As  the  Federal 
District  Court  for  the  Eastern  District  of  Arkansas  observed: 


The  "voluntariness"  with  which  a  worker  assigned  to  a 
dangerous  machine  in  a  factory  "assumes  the  risk  of 
injury"  from  the  machine  is  illusory. 

Thus,  it  appears  that  most  courts  will  permit  a  jury  to 
consider  this  "economic  compulsion"  factor  in  its  appraisal  of  an 
assumption  of  risk  defense,  since  the  duties  of  employment  are  a 
significant  factor  in  deciding  whether  an  employee  proceeded 
unreasonably  in  using  an  obviously  dangerous  product.  It  has 
been  held  to  be  the  rule  in  Pennsylvania  as  well  that  the 
obligation  to  do  a  job  must  be  considered  in  determining  a 
standard  of  conduct  for  one  injured  in  the  performance  of  his 
employment  duties.  In  Hill  v.  Clark  Equipment  Co . ,  a 
Michigan  court,  applying  Alabama  law,  left  to  the  trier  of  fact 
the  question  whether  use  of  an  unguarded  machine  was  contributory 
negligence,  but  pointed  out  that:  "Hill  was  obliged  to  use  the 
forklift  truck  in  his  employment." 

The  Oregon  Supreme  Court  also  has  pointed  out  that  working 
conditions  are  a  relevant  element  to  be  considered  in  assessing 
the  reasonableness  of  encountering  a  known  risk  for  purposes  of 
establishing  the  assumption  of  risk  defense  outlined  in  Comment  n 
to  Section  402A: 

We  feel  that  working  conditions  and  related 
circumstances  are  a  particularly  relevant  consideration 
in  an  inquiry  into  the  reasonableness  of  a  decision  to 
encounter  a  job-related  danger.  Such  factors  often  will 
have  a  strong  influence  on  that  decision,  and,  in  some 
cases,  they  may  represent  the  most  important 
motivational  factors.  For  example,  a  worker  might  fear 
that  a  slowdown  in  his  individual  production  would  slow 
down  the  entire  production  team  and  thereby  draw  the 
attention  of  his  boss.  If  he  has  a  history  of  such 
slowdowns,  or  of  causing  excessive  spoilage  or  ruining 
machine  parts,  he  may  have  good  cause  to  fear  dismissal. 
The  job  market  could  be  tight,  and  he  may  have  little 
hope  of  being  able  to  find  a   new   job.    Moreover,   the 


11-40 


situation  may  demand  an  immediate,  hurried  decision.  It 

is  certainly  possible  that,  under  such  circumstances,  a 

reasonable    jury    could   find   that   his   decision  to 
encounter  a  known  risk  was  not  unreasonable 


Most  jurisdictions  hold  that  the  economic  compulsion  factor 
presents  a  jury  issue  in  respect  to  contributory  negligence  or 
assumption  of  risk  under  Section  402A  and  Comment  n.  The 
impact  of  this  factor  may  become  even  more  pronounced  as  the 
concept  of  manufacturer's  liability  for  "occupational  diseases" 
receives  more  attention. 

While  there  are  jurisdictions  which  refuse  to  permit 
consideration  of  "economic  necessity"  in  relation  to  assumption 
of  risk,     the  trend  may  be  to  accept  it. 

The  Presence  of  the  Employer 

It  should  be  noted  that  the  defendant,  the  manufacturer  of  the 
machine  involved  in  the  litigation  ,  has  not  been  the  party  who 
created  the  pressure  on  the  worker  to  act  as  he  did.  That  party 
is  his  employer.  In  that  regard,  a  manufacturer  may  attempt  to 
absolve  himself  of  liability  by  asserting  that  the  injured 
person's  employer  was  in  breach  of  some  obligation  to  the  worker. 
For  example,  it  is  a  tenet  of  product  liability  law  that  a 
manufacturer  or  supplier  must  warn  of  hazards  associated  with  the 
product.  If,  however,  a  court  concludes  that  this  duty  is 
limited  to  providing  cautionary  information  only  to  the  purchaser 
of  the  product  (the  employer),  an  employee  who  is  injured  because 
he  was  never  warned  about  a  hazard  may  be  prevented  from 
recovering  against  a  manufacturer  who  could  not  escape  liability 
if  the  injured  party  had  been  a  nonworkplace  user.  The 
Restatement  approach  to  the  problem  is  presented  at  length  in  the 
explanatory  notes  to  Comment  n  to  Section  388,  which  state  that 
giving  cautionary  information  to  a  third  person  may  be 
insufficient  to  relieve  the  supplier  from  liability  to  the 
injured  party. 

The  courts  have  given  sharply  divergent  responses  to  the 
question  of  whether  a  manufacturer  need  only  warn  its  immediate 
vendee,  the  employer,  or  whether  it  must  assure  that  the  ultimate 


11-41 


user  of  the  product,   the   employee,   i 
associated  with  the  use  of  the  product. 


'44 


aware   of   the   hazards 


Some  courts  have  refused  to  decide  the  question  as  a  matter 
of  law,  leaving  to  the  jury  the  problem  of  deciding  whether  a 
warning   given   to   an   employer   is   sufficient   or   whether  the 


anufacturer  must  communicate  the   information   to   the   ultimate 


m 
user 


himself 


of  the  product 


246 


Other    courts   base    their    decision    on    the    nature 


Another  duty  to  users  which  manufacturers  attempt  to  "pass 
on"  to  the  employers  of  industrial  users  is  the  obligation  to 
provide  guards  or  safety  devices  on  hazardous  products.  Their 
attempts  in  this  respect,  however,  have  met  with  far  less  success 
than  in  the  duty  to  warn  context.  Basically,  a  manufacturer  may 
not  rely  on  the  expectation  that  the  employer  will  add  a  safety 
device      to    protect    the    user    of   his    product,  even    where    a    state 

safety  statute  requires  the  employer  to  supply  such 
protection.  Of      course,      where      an    employer    does    satisfy   his 

obligation  to  provide  adequate  safety  devices,  the  product  is  no 
longer  unreasonably  dangerous  and  recovery  against  the 
manufacturer  is  precluded  at  least  in  regard  to  claims  based  on 
defective   design. 


Another  group  of  cases  which  deal  with  work-related  injuries 
focuses  upon  specific  affirmative  actions  of  an  employer  which 
may  enable  a  manufacturer  to  avoid  liability  to  a  product-injured 
worker.  For  example,  a  manufacturer  may  avoid  liability  on  a 
theory  of  negligent  design  where  it  can  show  that  the  injured 
party's  employer  had  in  fact  submitted  the  design  and 
specifications        from      which      the      injury-producing      product      was 

imposition    of   defective   design 


;o 


constructed.   Simple  logic  forbi( 

liability   upon   a   nondesigner ."""   It   is   uncertain,   however, 

whether  this  result  will  occur  under  strict  liability  cases. 


One  action  of  an  employer  which  may  operate  to  deprive  an 
injured  worker  of  his  right  to  recovery  against  a  manufacturer  is 
the  effectuation  of  an  alteration  of  the  product.  This  was 
expressly  noted  when  Section  402A  was  promulgated.  Today, 
however,  state  courts  appear  to  differ  as  to  whether  the 
manufacturer  had  a  duty  to  foresee  that  the  manufacturer  would 
alter   the   product   and   enhance   its   danger.   Some  courts  have 


11-42 


placed   a   duty  on  a  manufacturer  to  design  its  product  in  such  a 
way  as  to  preclude  such  alteration. 

Thus,  the  presence  of  the  employer  is  a  factor  to  be 
considered  in  many  workplace  product  liability  cases,  but  the 
cases  do  not  agree  as  to  how  his  actions  should  relate  to  the 
relationship  between  the  injured  worker  and  the  manufacturer  of  a 
product . 

Conclusion 

It  cannot  be  denied  that  courts  have  added  judicially  created 
factors  such  as  experience,  economic  necessity,  and  presence  of 
employer  to  the  statutory  compensation  schemes  enacted  in  all 
jurisdictions,  to  produce  a  phenomenon  of  different  treatment  of 
workplace,  as  opposed  to  non-workplace,  product  injuries.  The 
result  has  been  a  shifting  of  ultimate  costs  in  regard  to 
workplace  accidents.  The  costs  of  these  accidents  are  ultimately 
resolved  outside  of  the  Worker  Compensation  system.  The  Task 
Force  has  considered  a  number  of  proposals  for  change  in  this 
area.  In  that  regard,  the  reader  is  directed  to  discussions  in 
Chapter  VII  dealing  with  contribution  and  indemnity  as  applied  in 
the  workplace,  p.  88;  prohibition  or  modification  of  subrogation 
by  Worker  Compensation  carriers,  p.  95;  and  Worker  Compensation 
as  a  sole  source  of  recovery — Abolishing  the  Worker's  Third  Party 
Claim,  p.  103. 

A  REVIEW  OF  PRODUCT  LIABILITY  DATA 
AVAILABLE  FROM  THE  LEGAL  SYSTEM 

A  Survey  of  Secondary  Sources 


Introduction 


The  Legal  Study's  comprehensive  search  for  caseload  data 
rtaining  to  product  liability  court  actions  filed  from  1970  to 
e  present,  both  nationwide  and  in  particular  jurisdictions, 
veals  that  there  is  no  large  body  of  such  data.   Of   the   state 


pe 

the   p 
reveals  th 

court   da„„  ^^^^. —  . ,  ^  

has  specific  data  on  product  liability  cases. 

Office   of  the  United  States  Courts  also  reports  such  data.   from 
ces,  however,  the  data  are  available  beginning   only   in 


ent,  Dotn  nationwiae  ana  m  particular  j ur isa ic tions , 
hat  there  is  no  large  body  of  such  data.  Of  the  state 
ta  collection  services,  only  one--that  of  Connec ticut-- 
fic  data  on  product  liability  cases.   The  Administrative 


uiiice   oi  tne  uniteu  :>Lates  uour  us  aisc 
both  sources,  however,  the  data  are  ava: 


II-M3 


the  1974  reports.  A  number  of  private  sources  have  also  begun  to 
collect  product  liability  litigation-related  data,  although  as 
yet  not  very  much  is  available.  See  Volume  III,  Legal  Study,  for 
a  detailed  discussion  and  listing  of  the  secondary  sources 
reviewed    and    the   methodology   used    in    the    survey. 

Sources   of   Data    and    Analysis 

Annual  Report  of  the  Director  of  the  Administrative  Office  of 
the  United  States  Courts . — Since  fiscal  year  1974  (ending  June 
30,  1974),  the  Annual  Report  of  the  Director  of  the 
Administrative  Office  of  the  United  States  Courts  has  provided 
data  on  cases  in  the  Federal  District  Courts  alleging  product 
liability  claims.  In  fiscal  year  1974,  data  included  product 
liability  cases  filed,  cases  terminated,  and  cases  pending  at  the 
end  of  the  year.  In  fiscal  year  1975,  the  data  were  expanded  to 
include  a  specific  breakdown  of  cases  filed  by  seven  categories: 
contract  actions;  torts  to  land;  torts  to  personal  property; 
personal  injury  by  airline,  marine,  and  motor  vehicle;  and  all 
other  personal  injury.  These  categories  remained  intact  during 
fiscal  year  1976  (ending  June  30,  1976).  During  fiscal  years 
1975  and  1976,  however,  data  on  terminations  and  cases  pending 
were   discontinued. 

The  data  compiled  show  an  unquestionable  surge  in  product 
liability  cases  being  filed  in  the  U.S.  District  Courts.  The 
volume  has  risen  from  1,579  in  fiscal  year  1974  to  2,886  in 
fiscal  year  1975  (an  increase  of  83  percent  over  1974)  and  to 
3,696  in  fiscal  year  1976  (an  increase  of  28  percent  over  1975 
and  134  percent  over  1974)  (see  Table  II-1).  Comparing  1975  and 
1976,  the  relationships  of  the  three  broad  categories--contrac ts , 
torts  to  property,  and  personal  in jur y--remain  basically  constant 
( see    Table    II-2  )  . 

When  product  liability  suits  are  compared  to  other  civil 
suits,  it  becomes  clear  that  products  suits  involve  only  a  small 
portion  of  the  total  civil  caseload.  Although  the  percentage  is 
on  the  rise,  products  cases  represented  only  2.8  percent  of  the 
total    civil    caseload    in    1976    (see    Table    II-3). 

Similarly,  a  comparison  of  product  liability  claims  to  total 
personal    injury    torts    indicates    that      while      the      number      of      all 


11-44 


personal  injury  claims  has  remained  relatively  constant  from  1975 
to  1976,  products  claims  have  increased  significantly  (see  Table 
11-4)  . 

In  calendar  year  1976,  the  Administrative  Office  of  the 
United  States  Courts  also  began  to  collect  data  on  alleged 
damages  in  product  liability  suits.  Statistics  are  now  available 
for  the  first  three  calendar  months  of  1976  on  such  claims. 
These  statistics  indicate  that  relatively  high  amounts  of  damages 
are  being  claimed.  Of  the  713  product  liability  cases  filed  in 
which  damages  were  alleged,  total  damages  claimed  were 
$605,590,000.   The  average  claim  was  $849,000. 

It  should  be  noted  that  the  Legal  Study,  Volume  III,  contains 
an  amplified  discussion  of  product  liability  cases  in  the  Federal 
courts . 


Judic  ial    Department   of   Connecticut . - 
collect  and  report  data  specifically  on  prod 
is   Connecticut.    Since   1974,  data  have  be 
number  of  product  liability  cases  filed  and 
docket  and  trial  lists  have  been  maintained 
a  jury  and  nonjury  breakdown  on   the   trial 
list"   records  the  filing  of  a  claim  in  a  co 
reflects  that  portion  of  docketed  cases  whic 
therefore   assigned  to  a  trial  date.   The  so 
however,  is  vehicular-related   product   liab 
detailed  statistics  are  reflected  in  Tables 
II-5  pertains  to  the  Courts  of  Common   Pleas 
pertains   to  the  Superior  Court,  which  has  e 
over  claims  above  $15,000. 


-The  only  state  to 
uct  liability  cases 
en  accumulated  on  the 

disposed  of.  Both 
for  this  period,  with 

1 ist .  The  " docket 
urt;  the  "trial  list" 
h  are  ready  for  and 
le  subcategor i za tion , 
ility  cases.  These 
II-5  and  II-6.  Table 
,  while  table  II-6 
xclusive  jurisdiction 


Although  percentages  based  on  claims  in  the  Court  of  Common 
Pleas  must  be  discounted  due  to  a  court  reorganization,  the  data 
show  clearly  that  product  liability  activity  is  increasing  in 
Connecticut.  From  the  period  covered  by  the  1974  report  to  that 
of  the  1976  report,  the  total  product  liability  cases  filed  in 
Superior  Court  have  increased  by  58  percent.  Nonvehicular- 
related  claims  account  for  the  largest  increase--66  percent. 
During  the  same  period,  the  total  torts  caseload  increased  by 
only  23  percent,  and  the  total  civil  caseload  increased  by  only 
11  percent.   Among  cases  assigned   to   trial,   product   liability 


11-45 


cases  showed  an  increase  of  36  percent,  while  all  torts  cases 
showed  an  increase  of  only  14  percent,  and  the  total  civil 
caseload  showed  a  decrease.  As  a  percentage  of  total  activity, 
however,  product  liability  cases  are  not  significant.  In  the 
period  covered  by  the  1976  report,  new  product  liability  claims 
accounted  for  only  2.6  percent  of  the  total  new  torts  claims  and 
.5  percent  of  the  total  new  civil  claims.  Trials  during  1976 
showed  that  product  liability  cases  accounted  for  only  1.8 
percent  of  the  total  torts  cases  tried  and  1.0  percent  of  the 
total  civil  cases  tried. 

The  information  concerning  product  liability  cases  in 
Connecticut  does  not  serve  as  a  basis  for  projections  or  comments 
on  the  current  status  or  trends  of  product  liability  cases 
nationwide.  Moreover,  it  should  be  noted  that  the  Connecticut 
court  data  do  not  address  the  issue  of  the  number  of  product 
liability  claims  settled  without  an  action  ever  having  been  filed 
in  court. 


Related  Surveys  Conducted  by  Other  Organizations 

Survey  of  product  liability  cases  in  the  greater  Kansas  City 
area  conducted  by  the  Kansas  Trial  Lawyers  Association.  --The 
Kansas  Trial  Lawyers  Association  recently  compiled  product 
liability  data,  collected  in  Smith's  Jury  Verdict  Serv  ice ,  for 
the  greater  Kansas  City  area,  covering  the  years  1967-75.  The 
survey  revealed  that  product  liability  cases  comprised  only  3 
percent  of  all  civil  cases  before  a  jury  in  the  9-year  period. 
This  percentage  has  remained  relatively  stable  during  that  time. 
In  addition,  the  Association  discovered  that  the  plaintiff  was 
successful  in  only  8  out  of  22  cases  (36  percent)  during  that 
period.  Awards  averaged  $9,850  per  verdict.  One-half  of  the 
successful  cases  involved  property  damage.  No  punitive  damages 
were  alleged . 

Illinois  Jury  Verdict  Report — Cook  County  Survey,  1970-75 . — A 
survey  of  products  cases  in  Cook  County  from  1970  to  1975 
revealed  that  plaintiffs  were  successful  in  only  103  of  290 
cases,  or  35  percent.  The  average  jury  award  in  these  cases  was 
$247,764.  A  survey  of  downstate  Illinois  cases  included  82 
cases.   In  40  of  these,  or  49  percent,  the   plaintiff   recovered. 


11-46 


The   jury  awards  in  these  cases  averaged  $100,332.   These  figures 
include  three  verdicts  totaling  over  $12  million. 

A  year-by-year  analysis  reveals  no  substantial  increase  in 
the  number  of  plaintiff  verdicts  (although  in  1975  there  was  a 
substantial  leap  from  197^--from  33  percent  to  43  percent).  The 
awards,  on  the  other  hand,  have  increased  significantly.  In  the 
first  half  of  1976,  the  number  of  suits  filed  in  Cook  County  has 
also    increased    significantly,    by    30    percent    (from    589    to    769). 

Conclusion 

Although  more  detailed  information  will  become  increasingly 
available  to  the  public  from  various  sources,  there  is  presently 
a  dearth  of  data  concerning  product  liability  litigation.  The 
data  that  are  available  suggest  that  products  actions  are 
increasing  significantly.  However,  products  cases  represented 
only  2.8  percent  of  the  total  civil  caseload  in  the  Federal 
District  Courts  for  fiscal  year  1976.  In  the  State  of 
Connecticut,  new  claims  concerning  products  in  1976  amounted  to 
only  .5  percent  of  the  total  new  civil  claims.  The  average 
damage  claim  (to  be  distinguished  from  award )  in  the  Federal 
District  Courts  was  $849,000  in  the  first  three  months  of  1976. 
Virtually  no  statistics  exist  which  reflect  the  amount  of  court 
time  that  is  being  spent  on  products  claims  in  relation  to  the 
total  caseload . 

An  Independent  Survey  of  Product  Liability  Appellate  Cases 

in  Selected  States 

Identification  of  Sample  States 

One  aspect  of  the  Legal  Study  involved  the  selection  of  a 
sample  of  eight  states  for  purposes  of  concentrated,  more 
detailed  analysis  within  the  limited  time  frame.  Analysis 
consisted  of  a  statistical  study  of  all  product  liability 
decisions  reported  in  the  West  Publication  System  since  1965,  in 
which  the  law  of  the  eight  selected  states  was  applied.  Most  of 
these  reported  decisions  were  appellate  cases.  Both  state  and 
Federal  cases  were  included  in  the  analysis.  It  should  be  noted 
that  Federal  courts  typically  apply  the  substantive  law  of  the 
state  in  which  the  court  is  located. 


11-47 


The  first  criterion  for  the  selection  of  the  sample  states 
was  that  the  particular  state  must  have  generated  a  substantial 
number  of  post-1965  reported  (that  is,  appellate  level,  except  as 
noted)  decisions  in  which  injuries  were  alleged  to  have  been 
sustained  as  a  result  of  a  defective  product.  Roughly  two-thirds 
of  the  states  were  eliminated  on  the  basis  of  insufficient 
decisions.  Apart  from  the  number  of  reported  decisions,  other 
more  substantive  criteria  were  utilized  in  the  selection  process. 
Of  the  group  of  states  which  had  a  sufficient  number  of  decisions 
to  allow  for  meaningful  statistical  analysis,  the  two  primary 
bases  for  selection  were:  (1)  by  particular  state,  the 
application  of  innovative  or  unorthodox  legal  theories  and 
approaches  to  product  liability  issues;  and  (2)  on  the  whole,  a 
balance  between  geographical  and  industrial  nature  of  the  states 
within  the  sample  group. 

Applying  these  criteria,  the  states  selected  were: 


Ar i  zona 
Cal ifornia 
111 inois 
New  Jersey 


New  York 
Pennsylvania 
Texas 
Wisconsin 


Certain  states  were  selected  largely  for  their  importance  in 
relation  to  the  "unorthodox"  criterion.  California  and  New 
Jersey,  for  example,  were  basically  selected  as  a  result  of  their 
allegedly  liberal  approach  to  product  liability  issues,  stemming 
from  early  acceptance  of  strict  liability  principles.  New  York, 
on  the  other  hand,  recognizes  only  a  negligence-based  cause  of 
action  in  defective  products  cases.  Wisconsin  is  the  sole  state 
with  substantial  experience  in  applying  comparative  fault 
principles  in  products  cases  and  was  chosen  for  that  reason.  In 
contrast  to  these  four  states,  Arizona  and  Texas  law  is  consonant 
with  "traditional"  product  liability  law  in  most  respects. 

Illinois  and  Pennsylvania  were  selected  mainly  due  to  their 
highly  industrialized  nature.  The  southern  and  western  states, 
in  contrast,  are,  on  the  whole,  less  industrialized.  In  general, 
the  sample  state  group  represents  a  mix,  not  only  of  diverse 
approaches  to  product  liability  issues,  but  also  of  geographic 
and  demographic  characteristics. 


11-48 


What  the  Survey  Showed 

-J 

-Introduction . — There  are  two  main  portions  of  the  report  on 
the  statistical  data  collected  from  the  eight  sample  states.  The 
first  section  of  the  survey  deals  with  the  findings  of  the  eight 
states  as  a  group,  and  is  useful  in  providing  basic  information 
as  to  generalized  trends  in  product  liability  cases.  The  second 
section  involves  a  state-by-state  breakdown  of  the  data  and  is 
relevant,  in  a  limited  way,  in  comparing  the  trends  among  the 
eight  states.  The  limits  of  the  second  section  must  be 
emphasized.  It  is  not  possible  in  a  survey  of  this  type  to 
determine  the  effect  of  one  particular  rule  of  law  in  a 
particular  state.  For  example,  although  the  data  collected  from 
California  decisions  are  useful  in  determining,  in  a  broad  sense, 
whether  that  state  applies  "liberal"  (that  is,  plaintiff- 
oriented)  principles  in  products  cases,  the  results  should  not  be 
seen  as  an  indication  of  the  effect  of  the  elimination  of  the 
"unreasonably  dangerous"  element  from  proof  of  defect.  Moreover, 
the  internal  law  of  a  state  on  any  given  issue  is  often 
inconsistent,  particularly  where  the  highest  state  court  has  not 
resolved  the  issue. 

Methodology. --The  cases  from  which  statistical  data  were 
extracted  were  located  through  the  use  of  the  West  headnote 
system.  Thus,  except  for  trial-level  decisions  in  the  Federal 
District  Courts  and  the  States  of  New  York,  New  Jersey,  and 
Pennsylvania,  all  decisions  included  in  the  survey  are  of  an 
appellate  nature.  All  personal  injury  decisions  under  the  topic 
heading  "product  liability"  and  other  relevant  key  numbers,  where 
defective  product  cases  were  concentrated,  were  consulted.  All 
products  cases  appearing  in  the  advance  sheets  located  in  the 
Harvard  Law  Library  by  September  29,  1976  were  also  included  in 
the  study. 

'  Six   hundred   fifty-five   total   decisions  were  surveyed  (see 
Table  II-7)  . 

A  general  problem  with  the  data  methodology  relates  to  the 
data  base.  Whether  the  data  base  is  a  valid  reflection  of  the 
total  number  of  cases  litigated  or  settled  within  the  states  is 
unclear.  There  is  no  available  information  to  assist  in  drawing 
a  conclusion  whether  appellate  cases  differ  from  all  cases  filed. 


11-49 


in  terms  of  product  class,  complexity  of  legal  issues,  or  size  of 
damage  award.  It  therefore  seems  imprudent  to  speculate  as  to 
how   the    sample   differs    from    all    products   cases    which    are    filed. 

Data    were    collected    in    ^^    categories: 

1.  Was    the    case    tried    in    a    state    or    Federal    Court? 

2.  What    was    the    product   class? 

3.  Identify  the  plaintiff,  the  defendant,  and  third 
parties  (indicate  whether  the  plaintiff  is  the 
injured    party)  . 

4.  Year    of  manufacture   of   product. 

5.  Year    of    injury. 

6.  Year    of   decision. 

7.  Was    the    injury    work-related? 

8.  Where    was    the    forum? 

9.  Was    the    trial    a    jury    trial    or    nonjury   trial? 

10.  Classify    the    alleged    product   defect. 

1 1 .  Who    prevailed? 

12.  Did    a    statute    limit    the    amount   of   recovery? 
13-  What    was    the    amount   of   damages? 

14.      Were   damages    at    issue    on    appeal? 


11-50 


Finding  s--The  Sample  States  as  a  Group 

J  The  Forum:   State  or  Federal 

Of  the  655  cases  in  the  survey,  509,  or  78  percent,  were 
tried  in  state  court.  Only  22  percent  were  tried  in  federal 
court . 

Product  Class 

Of  the  2^  product  classes  specified,  the  product  which  is 
most  frequently  the  subject  of  litigation  is  the  automobile  or  a 
part  of  the  automobile  (192  cases).  The  next  most  frequent  class 
is  assembly  line  and  other  industrial  type  machinery  or 
components  (57  cases).  These  are  followed  by  construction  and 
loading  equipment  (including  cranes  and  other  hoisting 
apparatus),  and  escalators  (28  cases);  ladders  and  scaffolds  (27 
cases);  chemicals  other  than  adhesives,  paints,  solvents,  and 
cleaning  products  (23  cases);  and  implements  (18  cases). 

When  product  class  is  compared  to  growth  of  litigation  data, 
it  may  be  seen  that  automobiles  and  industrial  products  account 
for  much  of  the  increase  in  caseload.  Of  the  655  cases  in  the 
study,  413  cases,  or  63  percent,  were  in  the  1971-76  period. 
Only  37  percent  of  the  cases  were  disposed  of  in  the  1965-70 
period  (see  Table  II-8).  This  breakdown  comports  with  the 
figures  gathered  by  the  Administrative  Office  of  the  United 
States  Courts  and  the  Judicial  Department  of  Connecticut  to  the 
effect  that  products  litigation  is  on  the  increase. 

Parties 

In  96  percent  of  all  products  cases  surveyed,  the  primary 
plaintiff  was  the  injured  party,  rather  than  another  party  who 
was  attempting  to  recoup  some  or  all  of  the  losses  that  had 
already  been  paid  to  the  injured  party.  As  might  be  expected, 
the  manufacturer  was  a  defendant  in  the  great  majority  (79 
percent)  of  the  cases.  The  retailer  was  a  defendant  in  33 
percent  of  the  cases.  Others  were  sued  infrequently.  The 
employer  was  listed  as  a  defendant  in  four  percent  of  the  cases, 
the  lessor  in  three  percent,  the  installer  in  five  percent,  the 
wholesaler    in    five    percent,    and    the      manufacturer's      supplier      in 


11-51 


five  percent.  The  Worker  Compensation  insurance  carrier  and 
other  insurance  carriers  were  typically  not  involved  as 
defendants.  The  cumulative  frequency  of  occurrence  exceeds  100 
percent  due  to  the  fact  that  multiple  responses  were  permitted  on 
this    question. 

Parties  other  than  the  plaintiffs  and  original  defendants 
were  involved  in  198,  or  30  percent,  of  the  cases.  The  third- 
party  plaintiff  category  was  led  by  the  manufacturer,  which 
became  a  third-party  plaintiff  in  76,  or  15  percent,  of  the  cases 
in  which  it  was  an  original  defendant.  The  retailer  also  became 
a  third-party  plaintiff  in  very  few  of  the  cases  in  which  it  was 
involved  as  an  original  defendant--35  of  216  cases,  or  16  percent 
of   such   cases . 

The  most  frequent  third-party  defendant  was  again  the 
manufacturer,  which  was  named  as  a  third-party  defendant  in  64  of 
the  cases.  The  employer  was  named  as  a  third-party  defendant  in 
50    of   the    655    cases--only    8    percent. 

Year  of  Manufacture 

Of  the  198  cases  which  stated  the  year  that  the  product  was 
manufactured,  the  median  date  was  1964.  Relatively  few  cases  in 
the  sample  involved  injuries  resulting  from  older  products. 
Thirteen  percent  of  the  cases  listing  the  date  of  manufacture 
involved  equipment  more  than  20  years  old  at  the  time  of  the 
injury.  Only  four  percent  of  the  cases  listing  the  date  of 
manufacture  involved  equipment  more  than  25  years  old. 

Year  of  In j  ury 

In  the  484  cases  which  provided  the  year  of  the  injury,  the 
median  date  was  1966.  It  was  possible,  in  30  percent  of  the 
cases,  to  compare  the  interval  between  the  year  of  manufacture 
and  the  year  of  injury  for  several  product  classes  within  a 
period  of  10  years.  As  shown  in  Table  II-9,  most  automobile 
cases  occurred  shortly  after  manufacture,  while  cases  related  to 
machinery  were  spread  throughout  the  period,  with  nearly  one- 
third  involving  injuries  occurring  10  or  more  years  after 
manufacture  and  about  15  percent  involving  injuries  from  products 


11-52 


more  than  20  years  old. 
patterns. 


Other   classes   showed   no   significant 


'-  Year  of  Decision 

For  cases  in  which  decisions  were  reported  more  than  once, 
the  latest  decision  was  selected  for  sampling  purposes.  As  noted 
in  the  results  concerning  product  class,  63  percent  of  the  post- 
1965  decisions  fell  within  the  1971-76  period.  There  was  a  71 
percent  increase  in  litigation  from  the  1965-70  period  to  the 
1971-76  period. 

Work-Related  In j  ur  ies 

With  work-related  injuries,  defined  to  encompass  more  than 
workpl ace- suffered  injuries  (a  truck  driver  who  has  an  accident 
has  suffered  a  work-related  injury)  roughly  half  of  the  products 
cases  were  categorized  as  involving  work-related  injuries.  In 
the  581  cases  in  which  it  could  be  ascertained  whether  the  injury 
was  work-related,  283  responses  were  positive,  while  298  were 
negative.  The  percentage  of  work-related  injuries  rose  only 
slightly  in  the  1971-76  period.  While  work-related  injuries 
accounted  for  46  percent  of  the  cases  in  the  1965-70  period,  they 
represented  slightly  more  than  50  percent  of  the  cases  in  the 
later  time  period.  In  contrast,  cases  involving  machinery  and 
tools  rose  sharply  over  the  two  periods  (see  Table  II-9). 

The  Forum 

The  forum  (court  selected  by  plaintiff(s)  for  bringing  the 
action)  was  most  often  located  in  the  state  of  injury,  followed 
by  the  home  state  of  plaintiff  and  then  by  the  state  of  sale. 
The  forum  was  less  often  located  in  the  manufacturer's  state  (see 
Table  11-10). 

Jury  or  Non-Jury  Trial 

Of  the  552  cases  which  indicated  whether  the  case  was  heard 
by  a  jury,  411,  or  74  percent,  were  so  heard.  Of  the  141 
remaining  cases,  73  were  disposed  of  prior  to  trial  and  68 
involved  nonjury  trials.  Thus,  of  the  cases  that  proceeded  to 
trial,   86  percent  were  heard  by  juries.   Where  the  plaintiff  was 


11-53 


the    injured    party,  87    percent   of   the      cases      which      proceeded      to 

trial      were      heard  by   a    jury.      Only    62    percent   of   the    cases    where 

the    injured      party  was      not      the      plaintiff      were      jury      trials, 

however.      There    is  also    a   growing    trend    toward    jury   trials: 


Type    of 
trial 


Pre-1971 


1971    and 
later 


Percentage 
increase 


Jury 


Non-Jury 


153 


30 


258 
38 


+69 
+27 


Type    of    Defect 


With  defect  types  categorized  as  manufacturing  defects, 
design  defects,  failure  to  warn,  unavoidably  unsafe  products, 
failure  to  inspect,  and  "other",  the  sample  showed  that  the  cases 
were  evenly  split  between  allegations  of  manufacturing  and  design 
defects.  While  allegations  of  a  design  defect  appeared  in  259 
cases,  there  were  243  cases  involving  manufacturing  defects. 
Failure  to  warn  was  alleged  in  130  cases,  failure  to  inspect  in 
40  cases,  and  an  unavoidably  unsafe  product  was  alleged  to  be 
"defective"    in    31    cases. 

When  the  type  of  defect  was  compared  with  product  class,  the 
most  interesting  results  involved  machinery  and  chemicals.  While 
there  were  64  allegations  of  defective  design  of  machinery,  there 
were  only  28  allegations  of  defective  manufacture.  In  the  case 
of  chemical  products,  22  of  the  cases  involved  a  failure  to  warn 
allegation,  while  only  five  cases  alleged  either  a  manufacturing 
or    a   design   defect. 

Pi  sposi tion 

Of  the  cases  which  were  decided  on  the  merits,  the  plaintiff 
prevailed  in  200,  or  51  percent,  while  the  defendant  prevailed  in 
189,  or  49  percent.  If  the  12  cases  in  which  the  action  was 
barred  due  to  its  procedural  posture  are  added  to  the  defendant's 
column,  the  split  is  clearly  even  between  plaintiffs  and 
defendants.       A    full    254    cases,    or    39    percent   of   the    sample,      were 


11-54 


remanded  by  the  appellate  court  for  further  proceedings.  The 
result  differs  somewhat  from  the  MAPI  survey  and  the  Illinois 
Jury  Verdict  Report,  which  showed  that  a  somewhat  smaller 
percentage  of  products  cases  resulted  in  judgments  for  plaintiffs 
in  the  1970-75  period.  It  does,  however,  conform  to  the  results 
found  in  the  survey  of  downstate  Illinois  cases,  where  plaintiffs 
prevailed  in  49  percent  of  their  actions. 

In  instances  where  it  was  possible  to  compare  the  disposition 
of  the  case  with  the  jury  or  non-jury  trial  data,  the  results 
indicated  that  the  plaintiff  prevailed  on  the  merits  in  60 
percent  of  the  jury  trials.  The  defendant,  on  the  other  hand, 
prevailed  in  56  percent  of  the  nonjury  trials.  This  figure  may 
be  misleading,  however,  as  someone  other  than  the  injured  party 
is  frequently  the  plaintiff  in  nonjury  trials. 

In  terms  of  the  relation  between  the  disposition  of  the  case 
and  the  type  of  defect,  plaintiffs  prevail  more  frequently  in 
manufacturing  defect  cases  than  in  design  defect  cases.  While 
the  plaintiff  prevailed  in  58  percent  of  the  manufacturing  defect 
cases,  the  defendant  prevailed  in  54  percent  of  the  design  defect 
cases.  The  defendant  also  won  51  percent  of  the  failure  to  warn 
cases . 

The  trend  of  disposition  shows  a  slight  move  toward  the 
plaintiff  in  the  more  recent  cases.  While  the  defendant 
prevailed  in  51  percent  of  the  cases  in  the  1965-70  period,  the 
plaintiff  won  53  percent  of  the  cases  in  the  1971-76  period. 

Statutory  Limits  on  Recovery 

Of  the  entire  sample,  only  one  case  involved  a  statute  that 
placed  limitations  on  the  recovery  by  a  prevailing  plaintiff. 
California's  wrongful  death  statute  precludes  recovery  for  pain 
and  suffering . 

Damages 

Data  involving  damages  were  extracted  only  from  those  cases 
in  which  the  plaintiff  ultimately  prevailed.  If  a  verdict  for 
the  plaintiff  was  reversed  on  appeal,  for  example,  the  damages 
data    were   not   considered.    Information    on    damages    was    provided      in 


11-55 


157  of  the  cases  in  which  the  plaintiff  prevailed.  Very  few  of 
these  cases,  however,  broke  down  the  damages  by  type.  No 
meaningful  figures  can  be  offered,  for  example,  on  damages 
awarded  for  pain  and  suffering.  The  average  damage  award  in  the 
157  cases  was  $181,401.  The  trend  is  clearly  in  the  direction  of 
recovery  of  greater  damages  by  injured  parties.  While  the 
average  damage  award  was  $104,202  in  the  1965-70  period,  the 
average  award  in  the  1971-76  period  was  $221,514  (see  Table  II- 
11).  Again,  this  finding  agrees  with  the  Illinois  Jury  Verdict 
Report,  which  showed  a  significant  recent  increase  in  damage 
awards.  When  broken  down  by  product  class,  the  greatest  amounts 
of  damages  were  recovered  in  cases  involving  machinery  and 
automobiles . 

Damages    on    Appeal 

Of  the  58  cases  where  the  amount  of  damages  was  at  issue  on 
appeal,  the  award  was  affirmed  in  44  cases  and  reduced  in  six 
cases.  In  eight  cases,  the  issue  was  remanded  to  a  trial  court 
for    disposition. 

Find  ings :       The    individual    sample    states 

The    Forum :       State    or    Federal 

All  states,  with  the  notable  exception  of  Pennsylvania, 
indicated  a  consistent  pattern  of  high  incidence  of  state  court 
cases.  In  Pennsylvania,  more  cases  were  decided  in  the  Federal 
court    than    in    the    state    court    (see    Table    11-12). 

Year    of   Decision 

Although  all  states  showed  an  increase  in  cases  decided  from 
the  1965-70  period  to  the  1971-76  period,  some  states  indicated 
faster  growth  than  others.  While  California  showed  only  a  16 
percent  increase  and  Arizona  only  a  25  percent  increase.  New 
Jersey  showed  a  211  percent  increase  and  Wisconsin  a  167  percent 
increase    (see    Table    11-13). 


11-56 


Work-Related  In j  ur ies 

The  only  states  where  more  work-related  than  non-work-related 
cases  appeared  were  the  highly  industrialized  states  of  Illinois 
and  Pennsylvania,  along  with  Wisconsin.  California  and  New 
Jersey  were  the  states  which  showed  the  highest  percentages  of 
non-work-related  injuries  (see  Table  11-14). 

Pi  sposi tion 

Plaintiffs  were  most  successful  in  cases  in  the  States  of 
California  and  Texas.  While  most  states  showed  a  fairly  even 
split  between  plaintiffs  and  defendants,  the  plaintiff  prevailed 
in  58  percent  of  the  California  cases  which  were  decided  on  the 
merits,  and  in  63  percent  of  the  Texas  cases  which  were  decided 
on  the  merits.  Of  the  states  in  which  there  was  a  substantial 
number  of  cases  in  the  sample,  the  defendant  was  most  successful 
in  Illinois,  where  it  prevailed  in  56  percent  of  the  cases 
decided  on  the  merits  (see  Table  11-15).  Thus,  the  Illinois  Jury 
Verdict  Report  is  not  substantially  in  conflict  with  the  results 
obtained  here. 

Damages 

Of  the  five  states--Cal ifornia ,  Illinois,  New  York, 
Pennsylvania,  and  Texas--which  provided  a  substantial  number  of 
cases  where  damage  awards  were  stated,  the  highest  damages  were 
awarded  in  California,  followed  by  Texas.  The  lowest  awards  were 
made,  on  the  average,  in  Illinois.  Insufficient  numbers  of  cases 
in  the  Arizona,  New  Jersey,  and  Wisconsin  samples  did  not  reveal 
the  pertinent  damages  information  necessary  to  draw  valid 
conclusions  regarding  damage  awards  in  those  states.  The  damages 
data  are  shown  in  Table  11-16).  It  is  interesting  to  note  that, 
of  the  five  sample  states  for  which  sufficient  data  were 
available,  the  highest  awards  were  made  in  those  states-- 
California  and  Texas--where  the  plaintiff  most  often  prevails, 
and  that  the  lowest  awards  were  made  in  Illinois,  where  the 
defendant   most    often    prevails. 


11-57 


NOTES  TO  CHAPTER  II 

''prosser,   "The   Fall  of  the  Citadel  (Strict  Liability  to  the 
Consumer),"  50  Minn  .  L.  Rev.  791  (1966). 

^32  N.J.  358,  161  A. 2d  69  (I960). 

^59  Cal.  2d  57,  377  P . 2d  897  (1963). 

Prosser,  supra  note  1,  50  Minn .  L.  Rev .  at  803. 

See  Kiely,  "The  Art  of  the  Neglected  Obvious  in  Products 
Liabil ity  Cases:  Some  Thoughts  on  Llewellyn's  The  Common  Law 
Tradition,"  24  DePaul  L.  Rev.  914  (1975);  Wade,  "On  the  Nature  of 
Strict  Liability  for  Products,"  44  Miss.  L.J.  825  (1973);  Keeton, 
"Product  Liability  and  the  Meaning  of  Defect,"  5  St_.  Mary'  s  L.J. 
30  (1973);  Hoenig,  "Product  Designs  and  Strict  Tort  Liability: 
Is  There  a  Better  Approach,"  8  S.W.U.  L.  Rev .  109  (1976);  Green, 
"Strict  Liability  under  Sees  402A  and  402B:  A  Decade  of 
Litigation,"  54  Tex.  L.  _Rev.  1185  (1976). 

See   Kiely,   supra  note  5;  Wade,  supra  note  5;  Keeton,  supra 


note  5. 
7 


See   Wade,   supra  note  5;  Keeton,  supra  note  5;  Green,  supra 


note  5 . 

o 

See  Schwartz,  Comparative  Negligence  (1974). 

0 

See   Klemme,   "The  Enterprise  Liability  Theory  of  Torts,"  47 
U.  Colo.  L.  _Rev.  153  (1976). 

1  0 

Hoenig,   "Product   Designs   and   Strict  Tort  Liability:   Is 

There  a  Better  Approach?";   8   Sw.   U.L.   Rev.   109,   111   (1976) 

(footnote  omitted). 

^''59  Cal.  2d  57,  377  P .  2d  897  (1963). 

""^377  P. 2d  at  900. 

1  3 

See ,   e.g. ,  Jiminez  v .  Sears ,  Roebuck  ^  ^ .,  4  Cal.  3d  379, 

482  P. 2d  681  (1971);  Pike  v.  Frank  G.  Hough  Co.,  2  Cal.   3d   465, 

467  P. 2d  229  (1970)  . 

""^8  Cal.  3d  121,  501  P .  2d  1153  (1972). 

See   Beron   v.   Kramer-Trenton  Co.,  402  F.  Supp.  1268  (E.D. 
Pa.  19757. 

1  ^ 

See   Kirkland  v.  General  Motors  Corp.  ,  521  P . 2d  1353  (Okla. 

1974);  Phillips  V.  Kimwood  Machine  Co.,  269  Ore.   485,   525   P. 2d 


11-58 


1033   (1974);   Turner   v.   General   Motors  Corp.  ,  514  S.W.  2d  497 
(Tex.  Civ.  App.  1974). 


17 


Seattle-First  National  Bank  v.  Tabert,  86  Wash.  2d  145,  542 


19 


P. 2d  774  (1975). 

1  R 

Phillips  V.  Kimwood  Machine  Co .  ,  supra  note  7. 

See   Reyes   v.   Wyeth  Laboratories,  498  F . 2d  1264  (5th  Cir. 
1974)  ( applying  Texas  law) . 

^°See,  e.g.  ,  Polk  v.  Ford  Motor  Co . ,  529  F.2d  259  (8th  Cir.) 
(applying  Missouri  law);  0 . S.  Stapley  Co .  v.  Miller ,  103  Ariz. 
556,  447  P. 2d  248  (1968);  West  v.  Caterpillar  Tractor  Co.  336  So. 
2d  80  (Fla.  1976);  Suvada  v.  White  Motor  Co.,  32  111.  2d  612,  210 
N.E.2d  182  (1965)  . 


21 


22 


Dippel  V.  Sciano,  37  Wis.  2d  443,  155  N.W.2d  55  (1967). 
Codling   V.  Paglia,  32  N.Y.2d  330,  345  N.Y.S.2d  461  (1973). 


23 

> 
24 


'See  Micallef  v.  Miehle  Co  .  ,  Div  ision  of  Miehle-Goss- Dexter , 
Inc. ,  39~N.Y.2d  376,  384  N.Y.S.2d  115  (197677 

Id. 


^Hoppe  V.  Midwest  Conveyor  Co.,  485  F.2d  1196  (8th  Cir. 
1973)  ( appl ying  Missouri  law) ;  Dorsey  v.  Yoder  Co . ,  331  F.  Supp. 
753  (E.D.  Pa.  1971),  aff 'd,  474  F . 2d  1339  (3d  Cir.  1973);  Cronin 
V.  J . B. E.  Olson  Corp . ,  supra  note  5;  Bal ido  v.  Improved 
Machinery,  Inc  .  ,  29  Cal.   App.  3d  633,  105  Cal.  Rptr  .  890  (1973). 

See  Wade,  "On  the  Nature  of  Strict  Liability  for  Products," 
44  Miss.  L.J.  825  (1973)  • 


27 


See  ,   e  .g 


Schenebeck  v.  Sterling  Drug,  423  F.2d  919  (8th 

Cir.  1970)  (applying  Louisiana  1  aw) ;  G¥r st  v.  General  Motors 
Corp.  ,  207  Kan.  2,  484  P. 2d  47  ( 1  97  lTr'MTc_al_l_ef  v.  Miehle  Co.  , 
Division  of  Miehle-Goss-Dex ter ,  Inc.,  supra  note  14. 


28, 

Mai 
29, 


*Keeton,   "Products   Liability  and  the  Meaning  of  Defect,"  5 
St.  Mary' s  L. J.  30,  39  (1973). 


Kar j  ala  v.  Johns-Manville  Products  Corp .  ,  523  F . 2d  155  (8th 
Cir.  1 975 )  Tapplying  Minnesota  law) ;  Borel  v.  Fibreboard  Paper 
Products  Corp.  ,  493  F.2d  1076  (5th  Cir.  1973),  cert,  denied  ,  419 
U.S.  869  (1974);  Chr istof fer son  v.  Kaiser  Foundation  Hospitals , 
15  Cal.  App.  3d  75,  92  Cal.  Rptr.  825  (1971);  Jones  v.  Hittle 
Service,  Inc  .  ,  219  Kan.  627,  549  P . 2d  1383  (1976);  Cunningham  v. 
Charles  Pfizer  &  Co.,  532  P . 2d  1377  (Okla.  1974). 


30 


Phillips  V.  Kimwood  Machine  Co.,  supra  note  7. 


11-59 


^""Byrns  v.  Riddell  ,  Inc.  ,  550  P .  2d  1065  (Ariz.  1976). 

Dorsey  v.  Yoder  Co . ,  supra  note  16. 

^^Wade,  supra  note  17,  44  Miss.  L.  J.  at  837-38. 

■^    Restatement  (Second )  of  Torts  Sec.  402A,  comment  i. 

^  Se£,  e.g.,  Sherrill  v.  Royal  Industries ,  Inc . ,  526  F.2d  507 
(8th  Cir.   1975)   ( applying   Nebraska   law) ;   Kar jala   v.   Johns- 

Manv  ille Products   Corp . ,  supra  note  20;  Car srell  v.  Altec 

Industries,  Inc  .  ,  335  So.  2d  128  (Ala.  1976). 

See  ,   e.g.,   Seattle-First   National  Bank  v .   Tabert ,  supra 
note  8  . 

37 

See  ,   e.g..   Burton  v .  L . 0.  Smith  Foundry  Products  Co . ,  529 

F.2d  108  (7th  Cir.  1976)   (applying   Indiana   lawTj  Sherrill   v. 

Royal  Industr  ies ,  Inc  .  ,  supra  note  26. 

^  See  ,  e.g.  ,  Davis  v.  Fox  River  Tractor  Co .  ,  518  F.2d  481 
(10th  Cir.  1975 )  (applying  Oklahoma  law);  Pike  v.  Frank  G.  Hough 
Co . ,  supra  note  4;  Casey  v.  Gif ford  Wood  Co . ,  61  Mich.  App.  208, 
232  N.W.2d  360  (1975);  Palmer  v.  Massey-Ferguson  ,  Inc .  ,  3  Wash. 
App.  508,  476  P. 2d  713  (1970)  . 

^^301  N.Y.  468,  95  N.E.2d  802  (1950).  Campo  was  overruled  by 
Micallef  v.  Miehle  Co . ,  Division  of  Miehle-Goss- Dexter  Inc . , 
supra    note    ^W. 

40 

Dorsey  v.  Yoder  Co .  ,  supra  note  16,  331  F.  Supp.  at  759. 

^^The  T.J.  Hooper,  60  F.2d  737  (2d  Cir.  1932);  Hall  v.  E.I. 
du  Pont  de  Nemours  &  Co.,  Inc  .  ,  345  F.  Supp.  353  TE.D.N.Y. 
1972);  Ford  Motor  Co.  v.  Thomas,  231  So.  2d  88  (Ala.  1970);  Hill 
V.  Husky  Briquetting,  Inc  .  ,  54  Mich.  App.  17,  220  N.W.2d  137, 
aff ' d,  393  Mich.  136,  223  N.W.2d  290  (1974). 

42 

Cunningham   v.   MacNeal  Memorial  Hospital  ,  47  111.   2d  443, 

266  N.E.2d  897  (1970);  Gelsumino  v.  E.W.  Bliss  Co.,  10  111.   App. 

3d  604,  295  N.E.2d  110  (1973)  • 

4? 
^Stanfield   v.   Medalist   Industries ,  Inc  .  ,  34  111.   App.  3d 

635,  340  N.E.2d  276  (1975)  . 

44 

See  ,   e.g.,   Ulrich   v.  Kasco  Abrasives  Co . ,  532  S.W.3d  197 

(Ky.  1976) ;  Kuisis  v.  Baldwin-Lima-Hamilton  Corp.,  457   Pa.   321, 

319  A. 2d  914  (1974)  . 

45. 


Id 
46 


Hoenig,  supra  note  1. 


11-60 


47 

Henderson,  "Design  Defect  Litigation  Revisited,"  61  Cornell 

L.  _Rev.  541  (1976). 

48 

Twerski   et  al . ,  "The  Use  and  Abuse  of  Warnings  in  Products 

Liability — Design  Defect  Litigation  Comes  of  Age,"  61  Cornell   L^. 

Rev.  495  (1976). 


49 


Sterling  Drug,  Inc.  v.  Yarrow,  408  F.2d  978  (8th  Cir.  1969) 


(applying  South  Dakota  law);  Gherna  v .  Ford  Motor  Co . ,  24  6  Cal . 
App.  2d  639,  55  Cal.  Rptr .  94  (1966);  Restatement  (Second)  of 
Torts  Sec.  388  (1965)  . 


50 


Basko   v.   Sterling  Drug,  Inc.,  416  F . 2d  417  (2d  Cir.  1969) 


(applying  Connecticut  law);  Cannifax  v.  Hercules  Powder  Co.,  237 
Cal.  App.  2d  44,  46  Cal.  Rptr.  552  (1965);  RTstatementTSecond ) 
of  Torts  Sec .  402A. 


51 
)  ■ 

'i . 
53, 


Davis   V.  Wyeth  Laboratories,  Inc  .  ,  399  F.2d  121  (9th  Cir. 

1968)  ( applying  Montana  law). 

'Walsh   V.  National   Seating  Co . ,  411  F.  Supp.  564,  570  (D. 
Mass.  1976)  . 


See  ,  e.g.,  Jackson  v .  Coast  Paint  &  Lacquer  Co . ,  499  F . 2d 
809  (9th  Cir.  19741  (applying  Montana  lawT;  Basko  v.  Sterling 
Drug  ,  Inc  .  ,  supra  note  2;  Barth  v.  B . F .  Goodrich  Tire  Co . ,  265 
Cal.  App.  2d  228,  71  Cal.  Rptr.  306  (1968)  .  But  see  Hasson  v. 
Ford   Motor  Co. ,  51  Cal.  App.  3d  104,  123  Cal.  Rptr.   798  (1975). 

54 

See   Annot.,   "Failure   to  Warn  as  Basis  of  Liability  Under 

Doctrine  of  Strict  Liability  in  Tort,"  53   A.L. R.   3d   239,   Sec. 

2[b]   (1973);   Noel,   "Products   Defective   Because  of  Inadequate 

Directions  or  Warnings,"  23  S. W.L.J.  256,  260  (1969). 


55 


See,   e.g.,  Wagner  v.  Larsen,  257  Iowa  1202,  136  N.W.2d  312 


(1965);  Penn  v.   Inferno  Manufacturing  Corp.,  199  So.  2d  210  (La. 
App.),  aff'd,  215  La.  27,  202  So.  2d  649~TT967). 

56 

See  ,   e.g.  ,   Tinnerholm   v  .  Parke-Dav  is  _&  C_o  .  ,  285  F  .  Supp  . 

432  (S.D.N.Y.  1968)"r~a7f'd,  411  F.2d  48  (2d  Cir.  1969)   (applying 

New  York  law) . 

57 

Basko   V.  Sterl ing  Drug  ,  Inc .  ,  supra  note  2;  Dav is  v.  Wyeth 

Laboratories ,  supra  note  3. 
58, 


427 


Basko   V.   Sterl ing   Drug,   Inc.,  supra  note  2,  416  F.2d  at 


59 


993. 


Sterling   Drug,   Inc.   v.  Yarrow,  supra  note  1,  408  F.2d  at 


60 


Incollingo  v.  Ewing  ,  444  Pa.  263,  282,  A. 2d  206  (1971). 


11-61 


Jackson   v.   Coast   Paint  ^  Lacquer   Co.,   supra   note  5; 
Phillips  V.  Kimwood  Machine  Co.,  269   Ore.   4'B5",   525   P .  2d   1033 

(1974)  . 

62 
1039. 
63 


Phillips  V.  Kimwood  Machine  Co.,  supra  note  13,  525  P . 2d  at 


64 


Restatement  (Second)of  Torts  Sec.  402A,  comment  j  (1965). 

Restatement   (Second)  of  Torts  Sec.  402A,  comment  h  (1965). 

^^Hamilton  v.  Hardy,  549  P. 2d  1099  (Colo.  App.  1976); 
Cunningham  v.  Charles  Pfizer  &  Co . ,  532  P . 2d  1377  (Okla.  1974); 
Phillips  V.  Kimwood  Machine  Co.,  supra  note  13. 


66 


Davis  V.  Wyeth  Laboratories ,  Inc.,  supra  note  3. 


67 

).N 

68 


Hall   V.   E. I.   du   Pont  de  Nemours  &  £o.,  345  F.  Supp.  353 
(E.D.N.Y.  1972);  Cannifax  v.  Hercules  Powder  Co.,  supra  note  2. 


McCormack 


Hankscraft  Co.,  278  Minn.  322,  154  N.W.2d  488 


(1967). 

6q 

^Mountain  v.  Procter  &  Gamble  Co . ,  312  F.  Supp.  534  (D.  Wis. 

1970);  Alberto-Culver  Co.  v.  Morgan  ,  444  S.W.2d   770   (Tex.   Civ. 

App.     19F9T: 


70 

(1976) 

71 

72 


2    Frumer    &    Friedman,    Products   Liability   Sec.    8.03[1]    at    161 

See  ,  e.g.,  Basko  v.  Sterl ing  Drug ,  Inc .  ,  supra  note  2. 
Barnes   v.   Litton   Industrial   Products ,  409  F.  Supp.  1353 


(E.D.  Va.  1976). 


73,,. 
.si( 
74, 


'Kidwell ,   "The  Duty  to  Warn:   A  Description  of  the  Model  of 
Decision,"  53  Tex.  L.  Rev.  1375,  1403  (1975). 


See  ,  e.g.,  D' Arienzo  v.  Clairol  ,  Inc  .  ,  125  N.J.  Super.  224, 
310  A. 2d  106  (1973);  Perma-Strate  Co.  v.  Gemus ,  58  Tenn.  App. 
325,  430  S.W.2d  665  (1968)  . 


75, 

2' 

76, 


'See  ,   e.g.  ,   Casetta   v  .  United  States  Rubber  Co  .  ,  260  C  a 1 . 
App.  2d  792,  67  Cal.  Rptr  .  645  (1968)  . 


See  ,  e.g.,  Dav  is  v.  Wyeth  Laboratories,  Inc  .  ,  supra  note  3; 
Reyes  v .  Wyeth  Laboratories,  Inc  .  ,  498  F.2d  1264  (5th  Cir  . )  , 
cert .  denied  ,  419  U.S.  1096  (1974)  (applying  Texas  law). 

77 

See  ,   e.g.  ,   Kaempfe  v  .  Lehn  _&  Fink  Products  Corp .  ,  21  App  . 

Div.  2d  197,~2T9   N.Y.S.2d   840   (1964);   Alberto-Culver   Co.   v. 

Morgan  ,  supra  note  21 . 


11-62 


78 
79, 


See  Kidwell,  supra  note  25. 


See,   e.g.,  Posey  v.  Clark  Equipment  Co.,  409  F.2d  560  (7th 

Cir.  1969) ,  cert,  denied  ,  396  U.S.  940  (19697   (applying   Indiana 

law) .    See   al so  2   Hursh   &   Bailey,   American  Law  of  Products 

Liability  2d  Sec.  8:15  at  181  (1974). 


80 

1 

81 


See ,  e.g.,  Vroman  v.  Sears ,  Roebuck  &  _Co,  387  F.2d  732  (6th 
Cir.  1967 )  ( applying  Michigan  law). 

Blim  V.  Newbury  Industries,  Inc  .  ,  443  F.2d  1126  (10th  Cir. 
1  97 1  ) ;  Haugen  v .  Minnesota  Mining  &  Manuf ac tur  ing  Co . ,  550  P . 2d 
71  (Wash.  App.  197'57~; 


82 


See,  e.g.,  McCormack  v.  Hankscraft  Co.,  supra  note  20. 


83 

Jackson   v.   Coast   Paint  _&   Lacquer   Co .  ,   supra   note  5; 

Rindlisbaker  v.  Wilson,  95  Idaho  752,  519  P . 2d  421  (1974)  . 


84 
85, 


Moran  v.  Faberge,  Inc.,  273  Md .  538,  332  A. 2d  11  (1975). 


Burton  v.  L.O.  Smith  Foundry  Products  Co.,  529  F.2d  108 
(7th  Cir.  1976)  (applying  Indiana  law)  cf;  Martinez  v.  Dix  ie 
Carriers,  Inc  .  ,  529  F.2d  457  (5th  Cir.  197^)  (applying  Texas  law) 
(Professional  user). 


86 
87 


Restatement  (Second)  of  Torts  Sec.  388  (1965). 


Restatement  (Second)  of  Torts  Sec.  402A  (1965). 


88..,. 


Kidwell,  supra  note  25,  53  Tex .  L.  Rev .  at  1399. 

^^Jones  V.  Hittle  Service,  Inc.  ,  549  P . 2d  1383  (Kan.  1976); 
Morris  v.  Shell  Oil  Co. ,  467  S.W.2d  39  (Mo.  1971  )  . 

^^Jacobson  v.  Colorado  Fuel  &  Iron  Corp. ,  409  F.2d  1263  (9th 
Cir.  1 969 )  ( applying  Montana  law);  Barnes  v.  Litton  Industrial 
Products ,  supra  note  24. 


91 


92 
93 
94 


Basko  V.  Sterling  Drug ,  Inc .  ,  supra  note  2. 
Sterl ing  Drug  Co .  v.  Yarrow,  supra  note  1. 
Davis  V .  Wyeth  Laboratories ,  Inc .  ,  supra  note  3 
McCormack  v.  Hankscraft ,  supra  note  20. 


95 

Crocker   v .   Winthrop   Laboratories ,   Division   of  Sterl ing 

Drug ,  Jn£ . ,  514  S . W.2d  429  ( Tex.  1974). 

Q6 

^  Prosser,   Handbook   of  the  Law  of  Torts  Sec.  67,  at  453  (3d 

ed.  1964). 


11-63 


97 
98, 


Id.    at    il52 


Campo  V.  Scofield ,  301  N.Y.  468,  95  N.E.2d  802  (1950), 
overruled,  Micallef  v.  Miehle  Co . ,  Division  of  Miehle-Goss 
Dexter,    Inc.,    39    N.Y. 2d    376,    384    N.Y.  S.  2d    115    (197"^. 


99 


Micallef   v.   Miehle   Co 


Div  ision  of  Miehle-Goss  Dexter, 


Inc . ,  supra  note  3 •  See  al so  Pike  v .  Frank  G .  Hough  Co . ,  2  Cal . 
2d~  465,  467  P. 2d  229  (1970);  Palmer  v.  Massey-Ferguson  ,  3  Wash. 
App.  508,  476  P. 2d  713  (1970)  . 

See  Noel,  "Defective  Products:   Abnormal  Use,  Contributory 
Negligence,  and  Assumption  of  Risk,"  25   Vand .   L.   Rev  .   93,   96 

(1972)  . 

1  0 1 

See  ,  e.g..  Morrow  v.  Trailmobile ,  Inc .  ,  12  Ariz.  App.  578, 

473  P. 2d  780  (1970);  Patten  v.  Logemann   Brothers   Co.,   263   Md . 

364,   283   A. 2d   567   ( 1 971  ) ;  Parsonson  v.  Construction  Equipment 

Co.,  386  Mich.  61,  191  N.W.2dT55   TTTT 1 ) ;   Jennings   v.   Tamaker 

Corp.,  42  Mich.  App.  310,  201  N.W.2d  654  ( 1 9 72T; 

1  02 

Restatement   (Second )   of  Torts  Sec.  402A,  Comment  n.  See 

al so  Prosser,  supra  note  1,  Sec.  78  at  539;  Noel,  supra   note   5, 

25  Vand  .  L.  Rev .  at  121  . 


103 


See   Thomas 


Supp.  255~(E.D.  Pa.   197677 

104 
1976) . 

105 


American   Cystoscope  Makers,  Inc.,  414  F. 


See   Heil 


Berkebile 
(Pa.    1975T 


106 


Heil  Co.  V 


107c. 

Sweeney   v 

N.E.2d  170  (1970) 


Co .   V.   Grant ,   534  S.W.2d  916  (Tex.  Civ.  App. 

^-   Brantly  Helicopter  Corp.,  337  A . 2d  893,  901 

Grant ,  supra  note  9. 
Max   A.R.   Matthews  &  Co.,  46  111.  2d  64,  264 


108 

'.  P' 

109 


'See  ,   e.g.  ,   Ford  v.  Harnischfeger  Corp .  ,  365  F.  Supp.  602 
(E.D.  Pa.  197T1  Tapplying  Pennsylvania  lawTT 

Bartkewich  v.  Billinger,  432  Pa.  351,  247  A. 2d  603  (1968). 


^  ^^McDevitt  V.  Standard  Oil  Co.,  391  F.2d  364  (5th  Cir.  1968) 

(applying  Texas  lawTT   See  also  Par zini  v.  Center   Chemical  Co .  , 

234   Ga.   868,  218  S .  E."2d~580  ( 1  975  ) ;  D'Arienzo  v.  Clairol  ,  Inc.  , 
125  N.J.  Super.  224,  310  A. 2d  106  (^97JT'. 


1  1  1 
(1975)  . 

1  12 


Collins   V.   Musgrave,  28  111.  App.  3ci  307,  328  N.E.2d  649 


Henderson  v.  Ford  Motor  Co.,  519  S.W.2d  87  (Tex.  1975). 


11-64 


^  ^  ^  See  Rhoad_s  v.  Service  Machine  Co  .  ,  329  F .  2d  36?  (E.D.  Ark. 
1971  )  . 

Restatement  (Second)  of  Torts  Sec.  402A,  Comment  n.  See 
al so  Twerski ,  "Restructuring  Assumption  of  Risk  in  the  Products 
Liability  Era,"  60  Iowa  L.  Rev .  1  (197^). 

1  15 

1976)  . 

1  16, 


'Johnson   v.   Clark   Equipment  Co.,  5^7  P .  2d  132,  I^^O  (Ore. 


See  Hender  son  v.  Ford  Motor  Co . ,  supra  note  17. 

See  Erikson  v.  Sears,  Roebuck  &  Co.,  240  Cal .  App.  2d  793, 
50  Cal.  Rptr.  143  (196Fr 

Stewart   v.   Von   Sollrig   Hospital ,  Inc.,  24  111.  App.  3d 


1  17 
al  .' 
1  18 


599,  321  N.E.2d  428  (1974)  . 

"*  ''^McCurter   v.   Norton   Co.,   263   Cal.  App.  2d  402,  69  Cal 
Rptr.  493  (1968). 


120 


Erickson  v.  Sears,  Roebuck  &  Co.,  supra  note  22.   See  also 


Thomas  v.  American  Cystoscope  Makers,  Inc.,  supra  note  8 


121 


General  Motors  Corp.  v.  Hopkins,  535  S.W.2d  880  (Tex.  Civ 


App .  1976)  .   See  also  Edwards  v .  Sears,  Roebuck  &  £o. ,   512   F.2d 
276  (5th  Cir.  197  51  Tapplying  Mississippi  law) . 


122 
1976)  . 
123 


See  ,   e  . 


Tucci  V.  Bossert,  385  N.Y.S.2d  328  (App.  Div. 


8 


See  Thomas  v.  American  Cystoscope  Makers,  Inc.,  supra  note 


124 


See  ,   e.g.,   Evans   v.   General  Motors  Corp .  ,  359  F.2d  822 

(7th  Cir.),  cert.   denied  ,  385  U.S.  836  (1966)  (applying  Indiana 

law).    See   also   Schemel   v.  General  Motors  Corp.,  384  F.2d  802 
(7th  Cir.  1967)  (applying  Indiana  law) . 

""^^Larson   v.   General   Motors   Corp.  ,  391  F.2d  495  (8th  Cir. 

1968)  (applying  Michigan  lawTl   "See  al so  Dyson  v.  General   Motors 

Corp.  ,   298   F.   Supp.   1064   (E.D.  Pa.  1969);  Ellithorpe  v.  Ford 
Motor  Co.,  503  S.W.2d  516  (Tenn.  1973). 

See,  e.g.,  Dunham  v.  Vaughan ,  86  111.  App.  2d  315,  229 
N.E.2d  684,  aff'd,  42  111.  2d  339,  247  N.E.2d  401  (1967). 

""^^Findlay   v.  Copeland  Lumber  Co .  ,  265  Ore.  300,  509  P .  2d  28 
(1973)  . 

1  p  Q 

Holmgren  v.  Massey-Ferguson ,  Inc .  ,  394  F.  Supp.  910 
(D.N.D.  1974),  rev'd  on  other  grounds,  516  F.2d  856  (8th  Cir. 
1975)  (applying  N.D.  lawT^ 


11-65 


129 


See   Cepeda  v.  Cumberland  Engineering  Co.,  138  N.J.  Super. 


344,  351  A. 2d  22  (App.  Div.  1976);  Bartkewich  v.  Billinger  ,  supra 

note  14. 


130 
131 


32  N.Y.2d  330,  298  N.E.2d  622  (1973). 

Micallef   v .   Miehle   Co . ,  Division  of  Miehle-Goss  Dexter , 


Inc  .  ,  supra  note  3- 

132 
(1970)  . 

133 


Stephan  v.  Sears,  Roebuck  &  £0,  110  N.H.  248,  266  A. 2d  855 
Dippel  V.  Sciano,  37  Wis.  2d  443,  155  N.W.2d  55  (1967). 


134 
135 


Id. 

See,   e.g.,  Hagenbuch  v.  Snap-On-Tools  Corp.,  339  F.  Supp. 


676  (D.N.H.  1972). 
136 


1976) 


West   V.   Caterpillar   Tractor   Co.,   336   So.  2d  80  (Fla. 


''^'^Kirkland   v.   General   Motors   Corp.,  521  P .  2d  1353  (Okla. 


1974)  . 
138 


Schuh  V.  Fox  River  Tractor  Co.,  63  Wis.  2d  728,  218  N.W.2d 


279  (1974). 

1  39 

Sun   Valley   Airlines  ,  Inc  .  v  .  Avco-Lycoming  Corp .  ,  411  F . 

Supp.  598  (D.  Idaho  1976)  . 

^^^Edwards  v.  Sears,  Roebuck  &  Co . ,  512  F . 2d  276  (5th  Cir. 
1975)  ( applying  Mississippi  1  aw) ;  see  Gilbertson  v.  Tryco 
Manufacturing  Co.  ,  Inc .  ,  492  F.2d  958  (8th  Cir.  1974)  (applying 
Minnesota  law);  Chapman  v.  Brown ,  198  F.  Supp.  79  (D.  Hawaii), 
aff 'd,  304  F.2d  149  (9th  Cir.  1962);  Haney  v.  International 
Harvester  Co.  ,  294  Minn.  375,  201  N.W.2d  140  (1972);  Etten  v.  Ava 
Truck  Leasing,  Inc.  ,  53  N.J.  463,  251  A . 2d  278  (1969);  Ritter  v. 
Narragansett  Electric  Co.,  109  R.I.  176,  283  A. 2d  255  (1971); 
Netzel  v.  State  Sand  &  Gravel  Co. ,  51  Wis.  2d  1,  186  N.W.  2d 
258,  262  (1971). 

1  4  1 

See     Schwartz,    "Strict    Liability    and    Comparative 

Negligence,"   42    Tenn .    L.    Rev  .     171    (1974);    Feinberg, 

"Applicability   of   a   Comparative  Negligence  Defense  in  a  Strict 

Products  Liability  Suit  Based  on  Sec.  402A  of  the  Restatement   of 

Torts   (2d)   (Can'  Oil   and   Water   Mix?),"  42  Ins.  Counsel  J_.  39 

(1975)  . 


142 


143 


Kinard  v.  Coats  Co. ,  553  P . 2d  835  (Colo.  App.  1976). 
Strakos  v.  Gehring,  360  S.W.2d  787,  798  (Tex.  1962). 


11-66 


144 


Kossifos   V.   Louden   Machinery,   22  111.  App.  Sd  587,  317 


N.E.2d  749  (1974);  Stanfield  v.   Medalist   Industries,   Inc .  ,   17 
111.  App.  3d  996,  309  N.E.2d  104  (1974)  . 

^^^Symons   v.   Mueller   Co.,   526   F.2d   13   (10th  Cir.  1975) 
(applying  Kansas  law) . 

^^^Edwards   v.  E.I,  du  Pont  de  Nemours  Co. ,  183  F.2d  165  (5th 
Cir.  1950 )  ( applying  Georgia  lawTT 


147 


See   Comment,   "Another   Look   at   Strict   Liability:   The 


Effect  on  Contribution  among  Tortfeasors,"  79  Dickinson   L .   Rev . 
125  (1974). 


148 


The 


1939   version   of   the   Uniform   Contribution   Among 


Tortfeasors  Act  has  been  adopted  in  10  States.   The  1955  U. C. A.T, 
Act  has  been  adopted  in  7. 


149 


Fenton  v.  McCrory  Corp. ,  47  F.R.D.  260  (W.D.  Pa.  1969). 


^^  See,  e.g. ,  Burke  v.  Skyclimber ,  57  111.  2d  542,  316  N.E.2d 
516  (1974);  Beaumont  v.  Warner  &  Swasey  Co. ,  36  App.  Div  2d  894, 
320  N.Y.S.2d  201  (1971 );  Wagner  v.  United  Hoisting  Co. ,  37  Misc. 
2d  761,  23^  N.Y.S.2d  819  (1962) .  See  also  Zeremski  ,  "Expansion 
of  Third  Party  Recovery:  Common  Law  Indemnity,  Contribution, 
Or?"  63  111.  B.J.  684  (1975)  . 


151 


See   McClish  v.  Niagara  Machine  &  Tool  Works,  266  F.  Supp. 


987  (S.D.  Ind] 1967) ;  South  Austin  Drive-In  Theatre  v.   Thomison , 
421  S.W.2d  933  (Tex.  Civ.  App.  1967T^ 

1  52 

See  ,  e.g.  ,  Vergott  v .  Deseret  Pharmaceutical  Co . ,  463  F . 2d 

12  (5th  Cir.  1972);  South  Austin  Drive-In   Theatre   v.   Thomison , 

supra   note   9;   Brad  ford  v.  Bendix-Westinghouse  Automotive  Brake 

Co.,  517  P. 2d  406"^  (  Colo.  App"!  1973) ;  Williams~v .   Chrysler  Motor 

Co.,   271   So.   2d  551  (La.  App.  1972);  Lewis  v.  Amchem  Products, 

Inc.  ,  510  S.W.2d  46  (Mo.  App.  1974);  Heil  Co  v.  Grant,  53^  S.W.2d 

916  (Tex.  Civ.  App.   1976). 


153 


Goldstein   v.   Compudyne   Corp.,   45   F.R.D.  467  (S.D.N.Y. 


1968);  Rekab,  rn£-  v.  Frank  Hubetz  &  Co. ,  261  Md .  141,   274   A. 2d 
107  (1971). 


154 


Comment,  supra  note  5,  79  Dickinson  L.  Rev.  at  131. 


1  55 

See  ,   e.g.  ,   American   Auto   Insurance  Co .  v .  Moll ing ,  239 

Minn.  74,  57  N.W.2d  847  (1953)  • 

156 

White   V.   Texas   Eastern  Transmission  Corp.,  512  F.2d  486 

(5th  Cir.  1975)  (applying  Louisiana  law);  Prosky  v.  National  Acme 

404   F  ' 


Co.  , 


Supp.   852   (E.D.   Mich.   1975);  Jennings  v.  Franz 


Torwegge  Machine  Works,  3^7  F.  Supp.  1288  (W.D.  Va .   1972);   Auld 
V.   Globe   Indemnity  Co.,  220  F.  Supp.  96  (W.D.  La.  1963);  Howard 


11-67 


V.  Wilson  Concrete  Co.  57  F.R.D.  8  (D.  Mo.   1972);   Schweizer   v. 
Elox   Division   of  Colt  Industries,  133  N.J.  Super.  297,  336  A. 2d 

73  (1975). 

1  57 

Schwei  zer   v.  Elox  Div  ision  of  Colt  Industries ,  supra  note 

14,  336  A. 2d  at  79;  Auld  v.  Globe  Indemnity  Co.   supra   note   14, 

220  F.  Supp.  at  101 . 

Louisiana,   Maine,  Pennsylvania  and  Rhode  Island,  cited  in 
Comment,  supra  note  5,  79  Dickinson  L.  Rev  iew  at  131. 


159 
160, 


Maio  V.  Fahs,  339  Pa.  180,  14  A. 2d  105  (19^0). 


Chamberlain  v.  Carborundum ,  485  F.2d  31,  33  (3cl  Cir.  1973) 
(applying  Pennsylvania  law). 

1  A  1 

See  Kuziw  v.  Lake  Engineering  Co . ,  385  F.  Supp.  827  (N.D. 
111.  1974).  But  see  Kessler  v.  Bowie  Machine  Works ,  Inc .  ,  501 
F.2d  617  (8th  Cir.  1974) • 


162 


Carlson  v.  Smogard ,  215  N.W.2d  615  (Minn.  1974).   See  also 


Hanley  v.  International  Harvester,  29^  Minn.  375,  201  N.W.2d   140 
(1972)  . 


163 
t  1 
164 
17 
165 


'Hanley  v.  International  Harvester ,  supra  note  20,  201  N.W. 
2d  at  144. 

^Vandermark   v.   Ford   Motor   Co . ,  61  Cal.  2d  256,  391  P . 2d 
168,  171-172  (1964). 


166 


21  Cal.  App.  3ci  694,  98  Cal.  Rptr  .  702  (1971). 
98  Cal  .  Rptr .  at  705-706. 


"^Beckerman   v.  Walter  J .  Munro ,  Inc  .  ,  25  App.  Div.  448,  266 
N. Y.S.2d  996  (1966)  . 

^^^Duckworth  v.  Ford  Motor  Co. ,  320  F.2d  130  (3d  Cir.  1963); 
Chapman  v.  General  Motors  Corp.,  242  F.  Supp.  94  (E.D.  Pa.  1965); 
Barth  v.  G. P.  Goodrich  Tire  Co . ,  15  Cal.  App  3d  137,  92  Cal  Rptr. 
809  (1971);  Ford  Motor  Co.  v.  Russell  &  Smith  Ford  Co.,  474 
S.W.2d  549  (Tex.  Civ.  App.  1971). 

1  69 

Compare   McDonald   v.   Blue   Jeans  Corp .  ,  183  F.  Supp.  149 

(S.D.  N.Y.  I960)  with  Beckerman  v.  Walter  J.  Munro ,  Inc  .  ,  25  App. 

Div.   448,   266   M.Y.ST2d  9W    ( 1  9"66T:    See   also  Auld  v.  Globe 

Indemnity  Co  .  ,  220  F.  Supp.  96  (W.D.  La.  iWS)  . 

^'^^Watz  V.  Zapata  Off-Shore  Co.  ,  431  F .  2d  100  (5th  Cir.  1970) 
(applying  Texas  law) . 

1  7  1 

See  ,  e.g.,  McPhee  v.  01 iver  Tyrone  Corp . ,  353  F.  Supp.  601 

(N.D.  Miss.  1972). 


11-68 


1  72 

See  ,   e.g.  ,   Carulof  f  v  .  Emerson  Rad  io  _&  Phonograph  Corp  .  , 

445  F.2d  873  (2d  Cir"   1973)  (applying  New  York  law) ;  BoTg-Warner 

Corp   V.   White  Motor  Co. ,  3^4  F.2d  412  (5th  Cir.  1965)  (applying 

Texas  law);  Delaney  v.  Towmotor  Corp.  ,  339  F.2d  4  (2d  Cir.   1964) 

(applying  New  York  law). 

'''''^See,  e.g .  ,  Feinstein  v.  Greer  Hydraulics,  457  S.W.2d  789 
(Mo.  1970);  Mixter  v.  Mack  Trucks ,  Inc . ,  224  Pa.  Super.  313,  308 
A. 2d  139  (1973). 


174 


American   Radiator   Co.   and   S.S.   Corp   v.   Titan   Valve 


Manufacutring  Co . ,  246  F.2d  947  (6th  Cir.  1957)  (applying  Ohio 
law) ;  Wells  v.  Web  Machinery,  20  111.  App.  3d  545,  315  N.E.2d  301 
(1974);  Monahan  v.  Ford  Motor  Co. ,  231  N.Y.S.  2d  187  (Sup.  Ct . 
1962) ;  Reefer  Queene  Co .  v .  Mar  ine  Construe  tion  ^  Design  Co . ,  73 
Wash.  2d  774,  440  P. 2d  453  (1968)  . 

'''''^Tromza  v.  Tecumseh  Products  Co.,  378  F.2d  601  (3d  Cir. 
1967)  (applying  Pennsylvania  1  aw)  ;  BTJrbage  v.  Boiler  Engineer  ing 
&  Supply  Co. ,  433  Pa.  319,  249  A. 2d  563  (1969). 

^'^^Hill  V.  Wilmington  Chemical  Corp.  ,  279  Minn.  336,  156 
N.W.2d  898,  904  (1968)  . 

'  'PeYoung  v.  Kerr  Chemicals,  Inc .  ,  21  Cal.  App.  3d  1010,  99 
Cal.  Rptr  .  162,  164  (1971);  B.K.~Sweeney  Co.  v.  McQuay  Norris 
Manufacturing  Co.,  489  P . 2d  356  (Colo.  App.  1971);  Sorenson  v. 
Safety-Plate  ,  Inc  .  ,  216  N.W.2d  859,  862-63  (Minn.  1974Tr~^ 

17  8 

Liberty   Mutual   Insurance   Co .  v .  Will iams  Machine  _&  Tool 

Co.,  62  111.  2d  77,  338  N.E.2d  857,  860  (111.  1975). 

1  79 

See  ,  e.g.,  Wat z  v.  Zapata  Of f-Shore  Co . ,  supra  note  28. 

12  Uniform  Laws  Annotated  5  7  (Master  Ed .  1975 )  . 

based   on   relative   fault,"   53 


180 
181 


Annot.,    "Contribution 
A.L.R.3d   184,  191  (1973). 


182 


12  Uniform  Laws  Annotated  87  (Master  Ed.  1975) 


^^^Fehlhaber  v.  Indian  Trails,  Inc.  ,  45  F.R.D  285  (D.  Del. 
1968);  Burks  Motors,  Inc .  v.  International  Harvester  Co . ,  250 
Ark.  29,  466  S.W.2d  907,  rejl-  d en  .  ,  250  Ark.  641,  466  S.W.2d  943 
(1971);  Little  v.  Miles,  213  Ark.  725,  212  S.W.2d  935  (1948): 
Mitchell  v.  Branch,  45  Hawaii  128,  363  P . 2d  969,  978  (1961); 
Degen  v.  Bayman ,  200  N.W.2d  134  (S.D.  1972). 

^^^Nelson  v.  L.  &  L.  Press  Corp. ,  223  N.W.2d  607  (Wis.  1974); 
Pachowitz  v .  Milwaukee  and  Suburban  Transport  Co . ,  56  Wis .  2d 
383,  202  N.W.2d  268  ( 1 972Tr"Dippel  v.  Sciano,  37'1/is.  2d  443,  155 
N.W.2d  55,  64-65  (1967);  Bielski  v.  Schulze,  16  Wis.  2d  1,  114 
N.W.2d  105  (1962).   See  also  Jensvold,  "A  Modern  Approach  to  Loss 


11-69 


Allocation  Among  Tortfeasors  in  Products  Liability   Cases,"   197^ 
Ins.  L.J.  591,  58  Minn.  L.  Rev.  723,  7^47  ff.  (1974). 


185 


Packard  v.  Whitten,  274  A . 2d  169,  180  (Me.  1971). 


186, 
lyil 
187, 


'Cyr   V.   B_^  Offen   &   Co.,   501  F.2d  1145  (1st  Cir.  1974) 
(applying  New  Hampshire  lawT. 


188 
189 


190 


191 


ijorklund  v.  Hantz,  208  N.W.2d  722  (Minn.  1973). 
Jensvold,  supra  note  42. 
30  N.Y.2d  143,  331  N.Y.S.2d  382  (1972). 
331  N.Y.S.2d  at  386-387. 
N.Y.C.P.L.R.  Sec.  1402  (McKinney's  Supp.  1976). 


192 
S.2 
193 


Hughes   V.   Ataka   America ,   Inc .  ,   48   App.   Div  808,  369 
N.Y.S.2d  723  (1975)  . 

Walsh   V.   Ford   Motor  Co.,  70  Misc.  2d  1031,  335  N.Y.S.2d 


1 10  (1972)  . 

194 

Coons   V.   Washington  Mirror  Works ,  Inc .  ,  344  F.  Supp.  653 

(S.D.N.Y.  1972)  rev'd  on  other  grounds,  477   F.2d   864   (2d   Cir. 
1973)  . 


195 


196 


N.Y.    Gen.    Obligations   Law   Sec.    15-108    (McKinney's    1976). 
Langford      v.    Chrysler    Motors   Corp.,    513   F.2d    1121    (2d    Cir. 


1975)    (applying    New   York    law). 

197 
(1974)  . 

198 


Morales   v.   Moss,   44   App.   Div  2d  687,  355  N.Y.S.2d  456 


199 

200 

(1975)  .' 

201 


Gomes  v.  Brodhurst ,  394  F.2d  465  (3d  Cir.  1967). 

Hoffman  v.  Jones,  280  So.  2d  431  (Fla.  1973). 

hi      ^-   Yellow   Cab  Co.,  119  Cal.  Rptr.  858,  532  P. 2d  1226 

E.B.   Wills  Co.  V.  Superior  Court,  128  Cal.  Rptr.  541,  544 


(Cal.  App.  1976). 

^^^Gertz  V.  Campbell  ,  55  111.  2d  84,  302  N.E.2d  40  (1973). 

'Zaremski,   "Expansion  of  Third  Party  Recovery:   Common  Law 
Indemnity,  Contribution,  Or?",  63  111 .  B.J.  684  (1975). 


203 
mni 
204 


1976)  . 


Curtis   v.   Murphy  Elevator  Co.,  407  F.  Supp  940  (D.  Tenn . 


11-70 


205 


Ruvolvo  V.  U.S.  Steel  Corp.,  139  N.J.  Super.  578,  354  A. 2d 


685  (1976) 

206 
(1972)  . 

207 


1A.   Larson,   The  Law  of  Workmen  *  s  Compensation  ,  Sec.  1.10 
Larson,  supra  note  1,  Sec.  57.10. 


208 


209 


210 


21  1 


I_d.  Sec.  61.20. 

2A.  Larson,  supra  note  1,  Sec.  67.21. 

Id^.  Sec  .  71.10. 

See  Restatement  (Second)  of  Torts  Sec.  388  (1965). 


^^^See  ,   e.g.,  McDaniel  v.  Williams,  23  App.  Div .  2d  729,  257 
N.Y.S.2d  702  TT9^5  )  . 

^^^Lindenberg  v.  Folson,  138  N.W.2d  573  (N.D.  1965). 


214 


197  N.W.2d  202  (Iowa  1972). 


2  1  5 

; See  ,   e.g.  ,   Stief  v.  J . A.  Sexauer  Manufac tur  ing  Co . ,  380 

F.2d  453  (2d  Cir .   1967),   cert,   denied  ,   389  U.S.   897   (1967) 

(applying  New  York  law). 

Martinez   v.   Dixie  Carriers,  Inc  .  ,  529  F.2d  457  (5th  Cir. 

1976)  (applying  Texas  law) ;  Littlehale  v.  E.I,  du  Pont  de  Nemours 

and  Co.,  380  F.2d  274  (2d  Cir.  1967)  (applying  New  York  lawT^ 


217 


Madrid   v.   Mine   Safety  Appliance  Co.,  486  F.2d  856  (10th 


Cir.  1973)  (applying  New  Mexico  law);  Parr  is   v.   M.  A.   Br  uder  _& 
Sons  ,  Inc.,  261  F.  Supp.  406  (E.D.  Pa.  1966). 


218 


Sarnoff   v.   Charles   S chad ,   Inc.,   49  Misc.  2d  1059,  269 


N.Y.S.2d  22  (1966)  and  50  Misc.  2d  418,  270  N.Y.S.2d  763  (1966), 
modified ,  28  App.  Div.  2d  921,  282  N.Y.S.2d  967  (1967),  aff'd,  22 
N.Y.2d  180,  292  N.Y.S.2d  93,  239  N.E.2d  194  (1968). 


219 
(19 
220 


Clark   V.   Rental  Equipment  Co.  ,  300  Minn.  420,  220  N.W.2d 
507  (1974). 


221 


Note,  86  Harv.  L.  Rev.  923,  930-31,  (1973). 

Collins   V.  Ridge  Tool   Co.,  520  F.2d  591  (7th  Cir.  1975), 


cer t .  den  ied 


222 


301  N.Y.  468,  95  N.E.2d  802  (1950) 


223 
^Micallef 


V.   Miehle   Company,   Div  ision   of   Miehle-Goss 


Dexter  ,  Inc.,  39  N.Y.  2d  376,  384  N.Y.S.2d  115  (1976). 


11-71 


Compare  Rice  v.  Hyster  Co.,  540  P . 2d  989  (Ore.  1975),  with 
Lemberger  v.   Koehring  Co.,   63   Wis.   2d   210,   216   N.W.2d   542 

(1974)  . 

^^^Walsh  V.  Miehle-Goss  Dexter  ,  Inc.  ,  378  F.2d  409  (3d  Cir. 
1967)  (applying  Pennsylvania  1  aw) ;  Penn  .  v.  Inferno  Manufacturing 
Co.,  199  So.  2d  210  (La.  App.  1967)  ,  writ  refused  ,  251  La.  27, 
202  So.  2d  649  (1967).  But  see  Reed  v.  Carlyle  &  Martin ,  Inc . , 
214  Va.  592,  202  S.E.  2d  87Tn97Ty,  cert.  denied  ,  419  U.S.  859 
(1974) . 


226 


Salladin  v.  Tellis,  247  S.C.  267,  146  S.E. 2d  875  (1966). 


227 

IS, 

228 

2) 
229 
25 
230 


Restatement   (Second )   of   Torts   Sec.   402A,   explanatory 
notes,  comment  1  at  354  (1965). 

'457   F.2d  1262  (9th  Cir.  1972),  cert,  denied  ,  409  U.S.  876 
(1972)  (applying  Oregon  law). 

See  ,  e.g.  ,  Kopera  v.  Fisher  Sc  ientif ic  Co . ,  23  App.  Div  2d 
851 ,  259  N.Y.S.2d  165  (1965)  . 


Wagner  v.  Larson,  257  Iowa  1202,  136  N.W.2d  312  (1965). 


231 
33, 
232 
(19 
233 


irown  V .  Quick  Mix  Co .  ,  Div  ision  of  Koehring  Co .  ,  75  Wash . 
2d  833,  454  P. 2d  205  (1969T7 

•Hill  V.  Clark  Equipment  Co.,  42  Mich.  App.  405,  202  N.W.2d 
530  (1972)  (applying  Alabama  1  a wT . 

Weaver  v.  Ralston  Motor  Hotel ,  Inc . ,  135  Ga .  App.  536,  218 
S.E. 2d  260  (1975)  . 


234 
1972)  . 
235 


Powell   v.   E.W.   Bliss   Co.,  346  F.  Supp.  819  (W.D.  Mich. 


Rhoads  v.  Service  Machine  Co.,  329  F.  Supp.  367,  381  (E.D, 


Ark.  1971). 
236 


237 

238 


Walsh  V.  Miehle-Goss  Dexter ,  Inc  .  ,  supra  note  20. 
Supra  note  27. 
202  N.W.2d  at  536. 


239 
■.  1 
240 


Johnson  v.  Clark  Equipment  Co.,  547  P • 2d  132,  140-141 
(Ore.  1976)  . 

See  Merced  v.  Auto  Park  Company,  Inc.,  533  F.2d  71,  80  (2d 
Cir.  1976)  (applying  New  York  law);  alTd  Brown  v.  Quick  Mix  Co  .  , 
Div  ision  of  Koehring  Co.,  supra  note  26. 


11-72 


241 
(5' 
242, 


See   Borel   v.   Fibreboard   Paper  Products  Corp.,  493  F.2d 
1076  (5th  Cir.  1973),  cert,  denied  ,"  419  U.S.  869  (1974). 


See  Fore  v.  Vermeer  Manuf ac tur  ing  Co . ,  7  111.  App  3d  346, 
287  N.E.2d  526  (1972);  and  Johnson  v.  Benjamin  Moore  &  Co . ,  396 
F.  Supp.  362  (W.D.  La.   1975). 


243 


Restatement  (Second)  of  Torts  Sec.  388  (1965). 


244 

Compare  Weekes  v .  Michigan  Chrome  _&  Chemical  Co .  ,  352  F .  2d 

603  (6th  Cir.   1965)  (applying  New  Jersey  and  Michigan  law);   and 

Eck   V.   E. I.   du  Pont  de  Nemours  and  Co.,  393  F.2d  197  (7th  Cir. 

1968)  (applying  Indiana  law) . 


See  ,   e.g.,   West   v  .  Broder ick  and  Bascom  Rope  Co . ,  supra 


245 

note   9. 

?4fS 

See ,    e.g..    Younger    v.    Dow  Corning    Corp. ,    202   Kan.    674,    451 

P.  2d  177  (19'59T7 


247 
248, 


Jasper  v.  Skyhook  Corp.  ,  89  N.M.  98,  547  P. 2d  1140  (1976). 


Bexira  v.  Havir  Manufacturing  Corp.,  60  N.J.  402,  290  A. 2d 
281  (1972T: 


249 


Rios   V.   Niagara  Machine  &  Tool  Works ,  59  111.  2d  79,  319 


N.E.2d  232  (1974)  . 

250 

Garrison   v.   Orangeville   Manufacturing  Co .  ,  492  F.2d  346 

(6th  Cir.  1974)  (applying  Kentucky  law). 

251 

Restatement   (Second )   of   Torts ,   Sec.   402A,  explanatory 

notes,  comment  p  at  357  ( 1 965 )  . 


11-73 


TABLE  II-1 . --Federal  District  Courts  product 
liability  cases:   total  breakdown 


FY1974 


FY1975 


FY1976 


Contract  actions 

Torts  to  land 

Torts    to  personal    property 

Personal  injury   by   airline 

Personal  injury   by  marine 

Personal  injury   by  motor    vehicle 

Personal  injury--all    other 


278 

363 

42 

46 

173 

271 

301 

160 

46 

140 

438 

385 

1  ,608 

2,331 

Total    product    liability   cases 


1,579 


2,886 


3,696 


TABLE    II-2. — Federal    District   Courts 
product    liability    cases--breakdown    by    percentage 


FY1975 


FY1976 


Contract    actions:    percentage   of   total  9.6 
Torts    to    property:    percentage   of 

total  7.4 

Personal    injury:    percentage   of   total  82.9 


9.8 

8.6 
81  .6 


11-74 


TABLE    II-3 . --Federal    District    Courts    product    liab  il ity 
cases--comparison    to    total    civ  il    cases 


Total    product    liability   cases 

commenced 
Total    civil    cases   commenced 
Product    liability    percentage 


FY197^ 


FY1975 


FY1976 


1  ,579 

2,886 

3,696 

103,530 

117,320 

130,597 

1.5 

2.5 

2.8 

TABLE    II-4. — Federal    District    Courts    product 
liability    cases--per sonal    injury    torts 


FY1975 


Percentage 
FY1976  change 


Total    personal    injury   torts 
Product   liability   total 
Percentage 


21 ,221 

2,393 

11.3 


21 ,202 

3,016 

14.2 


-0.  1 
+26.0 


11-75 


TABLE  II-5. — Connecticut  Court  of  Common  Pleas"' --total 
prod  uct  liability  breakdown 


Category 

On  the 

b  \-  year 

docket 

P.L.  torts  other 

than  vehicular- 

- 

1974^ 

116 

1975 

126 

1976 

154 

Pend  ing^ 

Assigned  for  trial 


New  Entries' 


Assigned  for  t r- i a  1 
On  the 
Non j  ur y    Jur  y    docket      Non j  ur y     Jury 


1 1 

64 

41 

8 

73 

62 

7 

77 

69 

3 

6 

18 


27 
24 
29 


From  the 
docket 


48 
43 
98 


Pi  sposed  of 3 
Tr  led 

Non j  ur y    Jury 


6 

29 

6 

26 

6 

57 

Total  torts  other 
than  vehicular-- 

1974  2,778 

1975  2,852 

1976  3,626 


376  1,459 
367  1,450 
444      1,549 


1  ,129 

212 

630 

1,305 

223 

794 

1  ,737 

255 

663 

1  ,  189 

175 

742 

1,957 

509 

790 

2,027 

328 

989 

P.L.  V  ehicul 

ar 

torts-- 

1974 

48 

4 

28 

13 

1 

7 

18 

1 

14 

1975 

44 

4 

21 

19 

8 

2 

13 

1 

8 

1976 

56 

9 

23 

14 

6 

8 

27 

3 

14 

Total  vehicL 

lar 

torts-- 

1974 

^ 

499 

399 

2 

548 

1 

749 

230 

1 

,030 

2 

427 

279 

1 

535 

1975 

^ 

095 

362 

2 

248 

2 

685 

273 

91  0 

1 

905 

197 

1 

173 

1976 

5 

158 

453 

2 

238 

2 

835 

761 

966 

3 

278 

484 

1 

445 

Total  civil 

cases- 

._ 

1974 

13 

440 

3 

,074 

4 

289 

7 

609 

1 

,828 

1 

,808 

7 

930 

1 

,946 

2 

,467 

1975 

13 

999 

3 

004 

4 

094 

23 

901^^ 

2 

,587 

1 

,856 

1  1 

354^ 

1 

,600 

2 

062 

1976 

28 

092 

4 

,171 

4 

435 

30 

798 

5 

,887 

2 

,  161 

26 

700 

3 

,516 

2 

793 

The    reporting    period    extends    from    September    1    to    August    31    for    each    year 


■^Because  actions  entered  on  the  docket  are  usually  not  assigned  a  trial  date  at  the  time  of 
filing,  the  figure  in  the  left  column  (on  the  docket)  generally  will  not  equal  the  sum  of  the 
figures    in    the   middle   and    the    right   columns. 

■^Because  some  actions  are  disposed  of  by  dismissal  (following,  for  example,  a  settlement 
between  the  parties,  or  a  failure  to  prosecute  the  claim),  the  figure  in  the  left  column  (from  the 
docket)    generally   will    not    equal    the    sum    of   the    figures    in    the   middle   and    right   columns. 

The    circuit   court   docket    was   added    in    here    pursuant    to    a    court   system    reorganization. 


11-76 


Category 
_b^  year 


On  the 
docket 


TABLE  II-6. — Connecticut  Superior  Court''  --total 
prod  uc t  liability  breakdown 


Pend  ing^ 

Assigned  for  trial 

Non j  ur  y    Jury 


Mew  entr  ies*^ 
Assigned  for  trial 


On  the 
docket 


Non j  ur y 


From  the 


Pi  sposed  of 3 

Tried 


Jury    docket     Nonjury    Jury 


P.L.  torts  other 
than  vehicular-- 

1974^  226 

1975  221 

1976  25^^ 


18 
22 
14 


130 
122 
143 


58 
90 
96 


13 

35 

61 

4 

55 

57 

9 

53 

55 

44 
38 
33 


Total  torts  other 
than  vehicular-- 

1974  4,297 

1975  4,315 

1976  4,641 


353 

2,616 

1,353 

169 

851 

1  ,280 

129 

869 

336 

2,594 

1  ,702 

177 

1  ,039 

1  ,379 

127 

969 

359 

2,686 

1  ,899 

186 

1,111 

1,531 

170 

998 

P.L.  V  ehicul 

ar 

tor ts-- 

1974 

60 

- 

37 

25 

1975 

73 

- 

40 

26 

1976 

78 

2 

39 

35 

Total  vehicu 

lar 

torts-- 

1974 

7 

127 

399 

4 

676 

2 

686 

1975 

n 
1 

313 

3^*3 

4 

823 

2 

894 

1976 

7 

417 

302 

4 

889 

3 

062 

Total  civil 

cases 

._ 

1974 

29 

665 

4 

,235 

7 

731 

23 

170 

1975 

31 

960 

4 

,121 

7 

932 

25 

003 

1976 

32 

829 

3 

,316 

8 

183 

25 

793 

1 

1  1 

13 

2 

15 

19 

1 

20 

22 

243  1,855  2,511 
208  2,048  2,796 
165   2,106    2,908 


4,975   2,931    20,583 

11,977    3,356    24,116 

2,830    3,476    24,995 


14 
18 


197  1,740 
200  1,964 
157      1,977 


4,843      2,763 

10,718      3,107 

2,615      3,176 


The    reporting    period    extends    from    September    1    to    August    31    for    each    year 


^Because  actions  entered  on  the  docket  are  usually  not  assigned  a  trial  date  at  the  time  of 
filing,  the  figure  in  the  left  column  (on  the  docket)  generally  will  not  equal  the  sum  of  the 
figures    in    the   middle   and    right    columns. 

^Because  some  actions  are  disposed  of  by  dismissal  (following,  for  example,  a  settlement 
between  the  parties,  or  a  failure  to  prosecute  the  claim),  the  figure  in  the  left  column  (from  the 
docket)    generally   will    not    equal    the    sum    of   the    figures    in    the   middle    and    right   columns. 


11-77 


TABLE  II-7. — Key  statistical  breakdown — total  cases 
for  survey  undertaken  in  Legal  Study 

Arizona   27 

California   95 

Illinois   137 

New  Jersey   37 

New  York   108 

Pennsylvania   129 

Texas   100 

Wisconsin   22 

Total  cases   655 


TABLE  II-8. — Key  statistical  breakdown--trend :   product  class 


Prod  uc t  cl ass  cases 

Chem  ical 
Containers 
Machinery  and  tools 
Recreational 
Automobiles 


1965- 

■70 

18 

10 

28 

1  1 

5M 

1971-76 

15 
8 

63 

1 1 

138 


11-78 


TABLE  11-9 . --Key  statistical  breakdown --time  interval 
between  year  of  manufacture  and  year  of  in j  ur y  by 

product  class 


Years  difference 


1 
2 

3 
4 
5 
6 
7 
8 
9 
10  or  more 


Machinery 


Automotive 


4 
1 
1 
3 
1 
2 
3 

11 


51 

23 

10 

9 

11 

3 

4 

1 

1 

1 

3 

TABLE  11-10. --Key  statistical  breakdown:   forum 


1 


Yes 


No 


Unidentified 


State    of  manufacture   of 

the    product  22  73 

State   of   sale  178  8 

State    in    which   the 

injury   occurred  346  31 

Home    state   of   the 

plaintiff  184  9 

Corporate    headquarters 

of   the   defendant  65  66 


560 
469 

278 

462 

523 


1 
"Forum"      refers      to      the      state   or    federal    court    selected    by 

plaintiff(s)    for    bringing    the    action. 


11-79 


TABLE    11-11.-— Key    statistical    breakdown--trend 
total    damages    awarded 


Total    damage    category 

0-7,500 

7,500-18,000 

18,000-35,000 

35,000-50,000 

50,000-65,000 

65,000-90,000 

90,000-150,000 

150,000-250,000 

250,000+ 


1965-70 


1971-76 


Total 


10 

1 1 

21 

8 

7 

15 

6 

9 

15 

8 

6 

14 

5 

5 

10 

2 

13 

15 

6 

16 

22 

5 

15 

20 

5 

20 

25 

TABLE  11-12. — Key  statistical  breakdown — State  or 


F_ 

ed 

eral 

Court 

forum 

State 

St 

ate  Court 

£ 

ed 

eral  Court 

Arizona 

26 

1 

California 

89 

6 

111 inois 

115 

22 

New  Jersey 

34 

3 

New  York 

90 

18 

Pennsylvan  ia 

61 

68 

Texas 

77 

23 

Wisconsin 

17 

5 

Total 


509 


146 


11-80 


TABLE  II-I3. — Increase  in  number  of 


repor 

ted  cases: 

1965- 

-70 

V  . 

1971 

-76 

Percentage 

State 

1965-70 

1971- 

-76 

increase 

Arizona 

12 

15 

25 

California 

44 

51 

16 

Illinois 

49 

88 

80 

New  Jersey 

9 

28 

211 

New  York 

43 

65 

51 

Pennsylvania 

38 

91 

139 

Texas 

41 

59 

44 

Wisconsin 

6 

16 

167 

Total 


242 


413 


71 


TABLE  11-14. — Key  statistical  breakdown — work-  and 


non 

-wor 

k- 

■  rel 

ated 

cases 

Woi 

rk- 

Non 

-work- 

State 

rel  • 

ated 

rel 

ated 

Ind 

et 

erminable 

Arizona 

13 

13 

1 

Cal ifornia 

33 

55 

7 

Illinois 

75 

52 

10 

New  Jersey 

8 

25 

4 

New  York 

41 

47 

20 

Pennsylvan  ia 

60 

50 

19 

Texas 

41 

46 

13 

Wi  sconsin 

12 

9 

1 

Total 


283 


297 


75 


11-81 


TABLE  11-15. — Key  statistical  breakdown — disposition 


PI 

ainti 

ff 

De 

fendant 

Procedural 

Case 

State 

prevail 

s 

pr 

evail s 

bar 

remanded 

Arizona 

7 

10 

1 

9 

California 

33 

24 

3 

35 

Illinois 

41 

53 

3 

40 

New  Jersey 

11 

1  1 

- 

15 

New  York 

29 

27 

2 

50 

Pennsylvania 

36 

34 

1 

58 

Texas 

39 

23 

2 

36 

Vi  sconsin 

4 

7 

0 

11 

Total 


200 


189 


12 


254 


TABLE  11-16. — Key  statistical  breakdown — damages 


State 


Number    of   cases 
stating    damages 


Arizona 

5 

California 

26 

111 inois 

35 

New  Jersey 

6 

New  York 

21 

Pennsylvania 

32 

Texas 

29 

Wisconsin 

3 

Average 
award 

$  66,200 
271 ,558 
119,459 
415,551* 
169,787 
136,688 
221 ,216 
7,050 


The  figures  of  damage  awards  in  Arizona,  New  Jersey,  and 
Wisconsin  suffer  from  certain  circumstances  which  tend  to  skew 
the  data.  This  can  be  illustrated  by  looking  at  a  New  Jersey 
cas€.  The  original  sample  included  the  case  of  Huddell  v.  Levin  , 
395  F.  Supp.  64  (D.  N.J.  1975),  where  the  award  was  $2,024,700. 
Following  completion  of  the  sampling,  the  decision  in  that  case 
was  reversed  on  appeal.  See  Huddell  v.  Lev  in  ,  537  F.2d  726  (3d 
Cir  .  1976).  If  the  case  is  removed  from  the  damages  sample,  the 
average  damage  award  in  the  remaining  five  New  Jersey  cases 
becomes  $93,721.  As  noted  elsewhere,  the  data  concerning  Arizona 
and    Wisconsin    cases   are   based    on   very    few  cases. 


11-82 


Chapter  III 

The  Impact  of 
Product  Liability  on 
Selected  Industries 


CHAPTER  III— THE  IMPACT  OF  PRODUCT  LIABILITY 
ON  SELECTED  INDUSTRIES 

Introduction 

The  information  presented  in  this  chapter  came  primarily  from 
two  sources--a  telephone  survey  conducted  by  the  industry 
contractor  among  firms  in  nine  product  categories  selected  for 
study  by  the  Task  Force,  and  a  number  of  trade  associations  and 
three  other  private  organizations  which  furnished  information 
that    was    collected    in    surveys   of   their    own   members. 

Most  of  the  associations  providing  information  to  the  Task 
Force  are  involved  with  products  that  fall  within  the  nine 
selected         product        categories.  However,         several         of        the 

associations  and  the  three  private  organi zations--the  Risk  and 
Insurance  Management  Society,  RETORT,  Inc.,  and  the  National 
Federation  of  Independent  Business--are  concerned  with  other 
product    areas. 

As  Chapter  I  indicated,  it  was  not  feasible  to  study  all 
manufacturing  industries,  or  even  all  industries  that  were  likely 
to  have  product  liability  problems;  therefore,  a  selected  number 
of  product  categories  were  chosen  which  had  the  potential  for 
causing  serious  injury.  Also,  manufacturers  of  most  of  the 
products  selected  approved  (on  the  basis  of  anecdotal  data)  to 
have    product    liability    insurance    problems. 

The  product  categories  selected  for  study  were  divided  into 
two  groups:  (1)  products  with  workplace  impact,  and  (2)  products 
with  consumer  impact.  The  products  with  workplace  impact  include 
industrial  machinery,  grinding  wheels,  metal  castings,  and 
industrial  chemicals.  Products  with  consumer  impact  include 
aircraft  components,  automotive  components,  medical  devices, 
pharmaceuticals,    and    power    lawnmowers. 


In  both  the  telephone  survey  and  the  trade  association 
surveys  an  attempt  was  made  to  obtain  information  from  small, 
medium,  and  large  firms  in  each  product  category.  In  the 
telephone  survey  the  337  respondents  were  approximately  evenly 
distributed  among  the  three  size  categories.  They  were  also 
fairly   evenly   distributed    by    size    in    each   of   the    product      groups. 


III-1 


In  the  trade  association  surveys  the  size  distribution  varied 
considerably  from  one  survey  to  the  next.  However,  all  the 
surveys  together  provide  a  substantial  sample  of  all  three  size 
groups  . 

Additional  sources  that  were  examined  in  connection  with  this 
study  include  the  various  accident  and  injury  reporting  systems 
of  the  Federal  government  and  the  injury  data  reported  under  six 
state  Worker  Compensation  systems. 

Summary  of  Findings  of  the  Industry  Study's, 
Industry  Association  and  Other  Surveys 

Although  the  data  for  this  study  must  still  be  regarded  as 
fragmentary,  and  come  from  a  variety  of  rather  diverse  sources, 
there  is  enough  consistency  among  the  surveys  to  permit  some 
general  conclusions  to  be  drawn. 

(1)  A  large  majority  of  manufacturing  firms  reported  carrying 
some  form  of  product  liability  insurance.  Among  the  respondents 
to  the  telephone  survey,  86  percent  reported  carrying  product 
liability  coverage.  Large  firms  had  a  greater  tendency  to  carry 
product  liability  insurance  than  small  firms:  97  percent  versus 
7T  percent.  In  the  various  trade  association  surveys,  the 
percentage  reporting  product  liability  coverage  ranged  upwards  of 
85  percent. 

(2)  Unavailability  of  product  liability  insurance  coverage  was 
not  a  widespread  problem  among  the  firms  responding  to  the 
various  surveys.  Only  a  few  firms  reported  that  insurance  was 
unavailable  at  any  cost.  The  problem  of  high  and  rapidly  rising 
insurance  costs  was  much  more  prevalent. 

(3)  The  cost  of  product  liability  insurance  has  increased 
substantially  since  1971  with  the  largest  increases  having  taken 
place  since  197^.  The  average  percentage  increases  reported  by 
all  the  firms  in  the  telephone  survey  were  280  percent  for  the 
entire  1971-76  period,  and  210  percent  for  the  two-year  period 
from  1974  to  1976.  The  increases  reported  in  the  trade 
association  surveys  varied  widely  from  one  survey  to  another. 
Hov/ever,  the  median  increases  among  the  surveys  appear  to   be   on 


1 1 1-2 


the  same  order  of  magnitude  as  the  averages  for  the  telephone 
surveys . 

(  4  )      The    CO  s  t   o  f   pro  djj_cj^_]J,  a  b  i  1  i  t  y   in  s  u  r  a  n_c,e  ...p  er_  thousand    dollars 

of  sales    is   generally  much   higher    for    the    small firms r^p^rting 

in  the      various    surveys    than    fo_r  ^arg^    firms.       In   many   cases    the 

percentage    increases    i n„_c Q.S-tjs__.wff r e    a1  so— hl&Jiar for    smal  1     firms r~~ 

(5)  Despite  the  large  increases  in  product  liability  insurance 
costs  in  recent  years,  most  of  the  surveys  found  that  the  average 
cost  of  product  liability  insurance  still  represents  somewhat 
less   than    one    percent   of  the    total    cost   of   sales. 

(6)  There  is  an  increasing  trend  toward  higher  deductibles  and 
self-retention  levels  among  both  large  and  small  firms.  However, 
where  the  average  limits  of  liability  coverage  changed  at  all 
during  the  last  five  or  six  years  they  generally  increased 
somewhat . 

(7)  Both  the  telephone  survey  and  the  trade  association  surveys 
show  significant  increases  in  the  number  of  claims  and  in  the 
amounts  of  damages  sought  in  product  liability  claims  filed 
during  the  1971-76  period.  The  results  of  the  telephone  survey 
indicate  that  the  average  number  of  new  claims  per  firm  increased 
from  4.3  in  1971  to  10.3  in  1972,  and  to  12.2  in  1975.  The 
average  number  for  the  first  nine  months  of  1976  was  11.4.  The 
average  amount  of  damages  sought  in  new  claims  per  firm  rose  from 
$476,227  in  1971,  to  $1,711,039  in  1976.  The  industry 
association  surveys  show  the  same  trends,  although  the  percentage 
increases  were  considerably  larger  in  several  instances.  As  most 
attorneys  are  aware,  plaintiffs  frequently  request  more  in 
damages    than    they    ultimately    receive   or    expect    to    receive. 

(8)  The  number  of  pending  claims,  and  the  amounts  of  damages 
sought  in  pending  claims,  have  been  rising  more  sharply  than  new 
claims.  In  the  telephone  survey  the  average  number  of  pending 
claims  rose  from  3-5  per  firm  in  1971  to  18.8  in  1976. 
Meanwhile,  the  amount  of  damages  sought  in  pending  claims 
increased  from  $434,075  to  $3,526,992  per  firm.  The  trade 
association    surveys    show   the    same    pattern. 


/ 


III-3 


(9)  The  information  available  from  the  telephone  survey  and  the 
trade  association  surveys  on  damage  awards  and  out-of-court 
settlements  of  product  liability  claims  does  not  provide  a 
definite  indication  of  trends  in  recent  years.  There  appears  to 
be  a  general  upward  trend  in  the  amounts  of  damages  paid  or 
reserved,  but  there  is  a  great  deal  of  variation  from  year  to 
year  and  from  one  survey  to  another.  The  telephone  survey 
indicated  a  sharp  rise  in  the  average  amount  of  damages  paid  per 
firm  between  1971  and  1972,  from  $12,100  to  $28,800.  Since  1972 
there  has  been  no  significant  change  in  the  average  amounts  paid 
per  firm. 

(10)  Analysis  of  existing  Federal  accident  and  injury  reporting 
systems  and  the  New  York  State  system  indicates  that  there  has 
been  no  apparent  increase  in  the  frequency  of  product-related 
injuries,  at  least  in  the  nine  product  areas  selected  for  study. 
Consequently,  the  increases  in  product  liability  suits  and  claims 
in  these  product  areas  may  be  attributed  to  other  causes. 

Limitations  of  the  Data 

The  telephone  survey  included  responses  from  only  337  firms 
out  of  a  population  of  many  thousands  of  firms  in  the  nine 
product  areas.  While  these  firms  were  randomly  selected  within 
each  product  and  size  category,  the  size  of  the  sample  is  too 
small  to  assure  that  the  information  collected  is  representative 
of  those  product  areas  or  of  industry  in  general.  Also,  the 
product  lines  selected  were  ones  where  product  injury  risk 
appeared  to  be  greater  than  average. 

The  trade  association  data  were  collected,  and  in  some  cases 
analyzed,  by  private  organizations  which  were  interested  in 
assessing  the  impact  of  product  liability  on  their  own  members. 
The  techniques  for  collecting  and  analyzing  the  data  were  not 
consistent  among  all  of  the  trade  association  surveys.  In 
addition,  it  was  necessary  for  many  of  the  responding  firms  to 
rely  on  estimates  in  order  to  answer  some  of  the  questions  in  the 
surveys . 

It  should  be  noted  in  regard  to  all  product  liability  surveys 
that  most  product  liability  insurance  is  included  as  part  of  a 
larger   package   of  risk  insurance  coverage  called  "Comprehensive 


III-4 


General  Liability"  ( CGL) .  The  product  liability  portion  of  the 
insurance  premium  must  usually  be  estimated  since  it  is  generally 
not  stated  separately.  In  such  cases  estimates  of  product 
liability  premium  costs  were  made  by  the  individual  firms 
responding  to  the  surveys.  The  result  is  that  although 
statements  are  made  about  increases  in  product  liability 
insurance  costs,  such  statements  are  usually  based  on  experience 
with  CGL  premiums. 

In  the  telephone  survey  conducted  by  the  industry  contractor, 
the  181  firms  which  were  able  to  estimate  the  proportion  of  CGL 
premiums  accounted  for  by  product  liability  in  1976  attributed  78 
percent  of  the  total  premium  cost  to  product  liability.  The 
comparable  figure  for  1971  was  estimated  at  62  percent  by  118 
firms.  An  additional  43  firms  were  able  to  report  data  for 
product  liability  insurance  separately  in  1976,  while  only  12 
firms  had  such  data  for  1971. 

Data  on  claims  and  settlements  are  even  more  fragmentary  than 
those  for  insurance  costs.  These  data  also  are  likely  to  involve 
estimates,  or  incomplete  information  in  many  instances. 
Information  on  the  amounts  of  court  judgments  or  out-of-court 
settlements  is  frequently  maintained  by  a  firm's  insurance  broker 
or  underwriter  and  not  directly  by  the  firm.  In  such  cases  the 
information  must  be  obtained  from  the  insurance  agents  or  else 
estimated.  In  many  instances  this  information  was  not  reported 
at  all. 

Consequently,  while  the  Industry  Study's  telephone  survey  and 
the  various  trade  association  surveys  provide  the  only 
information  available  at  this  time  on  the  trends  in  product 
liability  claims,  settlements,  and  insurance  costs,  it  must  be 
recognized  that  this  information  is  subject  to  the  limitations 
associated  with  availability  of  the  basic  data  as  well  as  all  the 
other  limitations  discussed  in  this  section. 


III-5 


THE  INDUSTRY  STUDY'S  SURVEY 

Methodology 

How  the  firms  were  selected  and  questioned 

The  industry  contractor  conducted  a  telephone  survey  of 
manufacturers  in  the  nine  product  categories  selected  by  the  Task 
Force.  A  total  of  337  firms  responded  to  the  telephone  survey. 
The  survey  was  designed  to  provide  information  on  four  product 
categories  with  workplace  impact  and  five  product  categories  with 
nonworkplace  or  consumer  impact.  It  was  also  designed  to  provide 
information  about  small,  medium,  and  large  firms.  The  product 
categories  and  firm  size  categories  were  as  follows: 

Products  with  Workplace  Impact 

1.  Industrial   machinery:    metal   cutting,   metal  forming, 
woodworking,  and  textile  machinery 

2.  Industrial  grinding  wheels 

3.  Ferrous  and  nonferrous  metal  castings 

4.  Industrial  chemicals 
Products  with  Consumer  Impact 

1.  Aircraft  components 

2.  Automotive  components 

3.  Medical  devices 

4.  Pharmaceuticals 

5.  Power  lawnmowers 
Firm  Si  ze  Categories 

'k'\\       Small:   firms  with  sales  of  less  than  $2.5  million 


III-6 


2.  Medium:    firms  with  sales  between  $2.5  million  and  $100 
million  a  year 

3.  Large:   firms  with  sales  of  $100  million  and  over 

The  sample  of  firms  for  the  telephone  survey  was  drawn  from  a 
Dun  &  Bradstreet  list  which  identifies  firms  by  four-digit 
Standard  Industrial  Classification  (SIC).  A  random  sample  of 
about  20  firms  was  drawn  for  each  size  category  in  each  of  the 
nine  product  areas. 

Each  firm  selected  in  the  sample  was  contacted  by  telephone 
in  order  to  determine  whether  the  firm  was  indeed  engaged  in 
producing  the  product  in  question  and  whether  the  firm  would  be 
willing  to  participate  in  the  survey.  The  response  rate  was  68 
percent  overall,  ranging  from  53  percent  to  80  percent  among  the 
nine  product  categories. 

After  the  appropriate  person  to  respond  to  the  questions  was 
identified  within  each  firm,  a  copy  of  the  questionnaire  was 
mailed  to  that  person.  The  questionnaire  asked  for  information 
concerning  product  liability  such  as  trends  in  premiums  and 
claims,  the  impact  of  product  safety  programs  and  practices,  and 
types  of  product  liability  prevention  techniques  employed  or 
planned.  Information  was  also  requested  concerning  the 
effectiveness  of  suggestions  made  by  insurance  carriers  as  a 
result  of  loss  prevention  surveys. 

The  purpose  of  mailing  the  questionnaires  to  the  respondents 
was  to  acquaint  them  with  the  types  of  information  being  sought 
by  the  Task  Force  and  to  guide  them  in  the  collection  of  the 
necessary  data.  Within  ten  days  after  the  questionnaires  were 
mailed,  the  firms  were  again  contacted  by  telephone  in  order  to 
collect  the  information.  The  telephone  interviewers  recorded  the 
information  on  forms  designed  for  key  punching.  In  many  cases 
more  than  one  telephone  call  was  necessary  in  order  to  identify 
the  appropriate  person  within  a  firm  and  to  obtain  all  of  the 
required  information. 

As  we  have  indicated,  the  results  of  the  survey  are  not 
necessarily  representative  of  all  manufacturers  within  any  of  the 
particular   product   groups   or   size  categories,  nor  can  they  be 


111-7 


Characteristics  of  Responding  Firms 

The  response  patterns  by  product  and  sales  categories  are 
shown  in  Table  III-1.  Eleven  of  the  27  sample  cells  had  response 
rates  greater  than  75  percent  and  16  equalled  or  exceeded  65 
percent.  Only  three  of  the  cells  had  a  response  rate  of  less 
than  50  percent  and  one  of  these  is  a  special  case.  Only  eight 
firms  with  sales  of  $100  million  or  more  were  identified  in  the 
grinding  wheels  industry,  and  of  these,  three  responded  to  the 
survey  for  a  response  rate  of  38  percent.  However,  the  overall 
response  rate  for  that  product  category  was  62  percent. 

It  should  be  noted  that  not  all  respondents  were  able  to 
supply  data  for  every  question  for  every  year.  In  the  tables 
showing  the  results  of  the  survey,  the  number  of  firms  responding 
to  each  of  the  data  items  is  indicated.  Because  of  the  variation 
in  the  number  of  firms  responding  to  each  question,  care  must  be 
taken  in  making  comparisons  between  entries  in  different   tables. 

Table  III-2  shows  average  sales  per  firm  by  product  and  size 
category  for  1975.  While  the  average  size  of  sales  for  firms  in 
the  "medium"  firm  size  category  was  over  $27  million,  28  of  the 
119  responding  firms  in  that  category  had  sales  of  less  than  $5 
million,  and  54  had  less  than  $10  million.  The_refore ,  it  appears 
that  the  distribution  of  firms  within  the  $2.5  m i  1 1  ion__to___$10 0 
million  sales  category  is  skewed  somewhat  toward  the  smaller  end 
of  the  scale. 

Although  sales  data  are  shown  only  for  1975  in  the  table,  the 
results  of  the  survey  indicate  that  sales  increased  substantially 
for  all  product  and  size  categories  during  the  1971  to  1976 
period.  The  estimated  average  increase  for  all  firms  in  the 
survey  during  this  period  is  about  70  percent. 


III-8 


The  small-  and  medium-sized  firms  in  the  survey  were  found  to 
be  heavily  concentrated  in  the  nine  product  areas  that  were 
selected  for  the  study.  The  small  firms  indicated  that  83 
percent  of  their  total  sales,  on  the  average,  were  in  the 
specified  product  areas.  For  the  medium-sized  firms,  the 
proportion  was  77  percent.  As  may  be  expected,  the  large  firms 
were  more  diversified,  with  an  average  of  49  percent  of  their 
total    sales    attributable    to    the    designated    product   categories. 

RESULTS 

Insurance    Coverage 

About  86  percent  of  the  firms  in  the  survey  reported  that 
they  carry  some  form  of  product  liability  insurance  coverage. 
This  ratio  varied  somewhat  among  the  product  categories. 
However,  generally  75  percent  to  95  percent  of  the  firms  in  the 
various  product  categories  carry  some  form  of  product  liability 
coverage . 

The  variation  in  insurance  coverage  was  somewhat  larger 
between  small  and  large  firms  than  among  product  categories. 
About  97  percent  of  the  large  firms  carry  product  liability 
insurance,  while  only  71  percent  of  the  small  firms  have  such 
coverage.  About  87  percent  of  the  medium-sized  firms  reported 
product    liability    insurance    coverage.       (See    Table    1II-3.) 

The  reasons  given  for  not  carrying  product  liability 
insurance  are  shown  in  Table  I1I-4.  Slightly  less  than  7  percent 
of  the  responding  firms  indicated  that  they  did  not  carry  product 
liability  insurance  because  it  was  too  expensive  or  unavailable 
at  any  cost.  Another  5  percent,  mainly  small  firms,  indicated 
that    they   did    not   need    product    liability   coverage. 

Because  of  the  small  size  of  the  sample,  the  results  shown  in 
Table  III-M  cannot  be  applied  to  industry  as  a  whole,  or  to  the 
individual  product  categories.  However,  the  results  do  provide 
an  indication  that  a  significant  number  of  firms,  particularly 
small    firms,    are   going    without    product    liability    insurance. 

Approximately  64  percent  of  the  responding  firms  carry  both 
primary   and    umbrella      product    liability    insurance.      The    extent    of 


III-9 


for      all      products      of      the      responding      firms.  However,         the 

percentage  increases  were  on  the  same  order  as  those  reported  for 
the  other  categories  of  product  liability  insurance  coverage, 
about  200  percent  for  the  entire  1971-76  period  and  about  190 
percent    for    the    last    two    years    alone. 

Rates  per  thousand  dollars  of  sales  for  umbrella  coverage  are 
shown  in  Table  111-8.  Significant  increases  in  these  insurance 
rates  occurred  only  in  1976  for  medium  and  large  firms.  However, 
the  rates  in  all  years  were  much  higher  for  small  firms.  It  is 
also  apparent  that  the  tendency  to  carry  umbrella  insurance  is 
related  to  the  size  of  the  firms.  Small  firms  are  least  likely 
to  carry  this  type  of  coverage  while  a  high  percentage  of  the 
large    firms    have    umbrella   coverage. 

Trends    in    Deductibles    and    Limits   of   Liability 

The  number  of  firms  reporting  deductibles,  or  self-insurance 
retention,  and  the  average  amounts  of  deductibles  are  shown  in 
Table  111-9.  Deductibles  increased  at  irregular  intervals 
throughout  the  1971-76  period,  with  the  largest  increases 
occurring  in  1976.  At  the  end  of  the  period,  the  average  size  of 
the  deductibles  was  over  four  times  as  large  as  it  was  at  the 
beginning  of  the  period.  Meanwhile  the  number  of  firms  reporting 
deductibles  either  for  bodily  injury,  or  for  combined  bodily 
injury    and    property   damage,    increased    from    59    to    116. 

Deductibles  have  consistently  been  much  higher  for  large 
firms  than  for  medium  and  small  firms.  The  larger  firms  are  also 
more    likely   to    have   deductibles    than    the    smaller    firms. 

The  overall  average  limits  of  liability  for  bodily  injury,  or 
combined  bodily  injury  and  property  damage,  did  not  change 
substantially  during  the  1971-76  period.  The  large  firms  showed 
an  average  increase  about  in  line  with  inflation.  The  medium  and 
small  firms  indicated  no  clear  trend  in  the  limits  of  liability 
except  for  a  gradual  decrease  in  the  average  limit  for  small 
firms  in  the  combined  coverage  for  bodily  injury  and  property 
damage.  The  small  firms  in  the  survey  consistently  reported  much 
lower  limits  per  occurrence  than  the  larger  firms.  The  average 
limit    for    combined    bodily    injury    and    property      damage      for      small 


111-12 


firms      is      about    one-third    as    large    as    the    limit    for   medium-size 
firms,    and    less    than    one-sixth    as    large    as    that    for    large    firms. 


A  number  of  firms  reported  restrictions  on  insurance  coverage 
besides  the  limits  of  liability.  The  most  frequently  reported 
restriction  was  the  exclusion  of  certain  products.  Thirty-eight 
firms,  or  about  11  percent  of  the  total  number  of  firms  in  the 
survey,         reported         this        restriction.  Nine      firms      reported 

restrictions   on    coverage   of   legal      defense      costs      and      20      firms 
reported    other   miscellaneous    restrictions. 

Product    Liability    Claims    Experience 


The  numbers  of  firms  reporting  any  claims  during  the  1971-76 
period  are  shown  in  Table  111-10.  The  firms  reporting  claims  in 
the  nine  specified  product  areas  are  also  shown  in  the  table. 
The  number  of  small  firms  reporting  product  liability  claims 
during  this  period  was  relatively  small.  Only  18  firms,  or  about 
18  percent  of  the  small  firms  reporting  on  this  question,  had  any 
claims.  The  percentage  reporting  claims  was  considerably  higher 
for  the  medium  and  large  firms,  about  50  percent  and  96  percent, 
respectively.  As      might      be      expected,      the      number      of      firms 

reporting    claims    for    the    nine    specified    product   categories      alone 
was    somewhat    smaller. 

The  average  number  of  claims  pending  per  firm  at  the  end  of 
each  year  from  1971  to  1976  is  shown  in  Table  111-11,  by  product 
category.  Again,  it  should  be  noted,  that  the  data  for  1976 
cover  only  about  the  first  nine  months.  These  data  show  a 
substantial  rise  in  the  number  of  pending  claims  for  all  products 
during  the  six-year  period.  For  all  product  categories,  the 
average  number  of  pending  claims  increased  from  3.5  per  firm  in 
1971  to  18.9  per  firm  in  1976.  For  some  product  categories  the 
increase    was    substantially    sharper. 

Table  III-12  shows  the  average  number  of  new  claims  filed  per 
firm,  by  size  category,  from  1971  through  the  first  nine  months 
of  1976.  The  table  shows  that  there  was  a  sharp  rise  in  claims 
for  large  firms  between  1971  and  1972,  but  no  significant  change 
in    the    trend    of   new   claims    filed    for   medium    and    large    firms    since 


111-13 


1972.         However,    the    average   number    of   new  claims    for    small    firms 
rose    gradually   during    this    period. 

Table    111-13    shows    the  average   number    of   new   claims    filed    per 

firm    by    product   category.  These   data    reflect    sharp    increases      in 

new      claims      from      1971    to  1972    in    almost    all    product   categories. 

Since    1972    the    pattern    has  been    irregular,    with    increases    in    some 

product    areas    and    no    clear  trend    in    others. 

The  average  amounts  of  damages  sought  per  firm  in  pending 
claims  are  shown  in  Table  111-14.  The  average  amount  for  all 
firms  reporting  increased  eightfold  between  1971  and  1976.  Sharp 
increases  occurred  in  all  size  categories  throughout  the  six-year 
period  . 

The  trend  in  damages  sought  in  new  claim.s  during  the  1971-76 
period  is  less  clear  than  the  trend  in  pending  claims.  The 
average  amount  sought  per  firm  in  new  damage  claims  each  year  is 
shown  in  Table  111-15.  Although  there  appears  to  be  a  general 
increase  over  time  in  the  average  dollar  amounts  sought  per  firm, 
the    pattern    is    quite    irregular. 

It  should  be  noted  that  the  amount  of  damages  pending  at  the 
end  of  any  particular  year  should  be  equal  to  the  amount  of 
damages  pending  at  the  end  of  the  previous  year,  plus  any  new 
claims  filed  and  minus  any  claims  disposed  of  during  the  year. 
In  several  instances  the  reported  data  on  damages  sought  do  not 
appear  to  be  consistent  with  this  basic  mathematical  logic. 
However,  it  is  not  possible  to  determine  whether  the 
inconsistencies  result  from  variations  in  the  firms'  reporting 
practices    from    year    to    year,    or    from    simple   reporting    error. 

Damages    Paid 

The  average  amounts  of  damages  paid  per  firm  in  court 
judgments  and  out-of-court  settlements  are  shown  by  size  of  firm 
in  Table  III-16.  There  was  a  sharp  jump  in  the  average  size  of 
damages  paid  between  1971  and  1972,  from  $12,100  per  firm  to 
$28,800  per  firm.  Since  then  there  has  been  no  significant 
change  in  the  average  amounts  paid  per  firm.  The  absence  of  any 
trend  in  the  average  amount  of  damages  paid  per  firm  since  1972 
is    consistent    among    all    three    size    categories. 


III-14 


Product  Safety  and  Product  Liability  Prevention  Programs 

The  firms  responding  to  the  telephone  survey  were  asked  a 
number  of  questions  about  product  safety  practices  and  product 
liability  prevention  programs.  These  questions  included  such 
topics  as  quality  control,  design  and  engineering,  instructions 
and  warnings,  and  inspections  by  insurance  carriers.  The  results 
of  this  portion  of  the  survey  are  described  in  detail  in  Chapter 
IV. 

INDUSTRY  ASSOCIATION  AND  OTHER  PRIVATE  SURVEYS 

Organization  of  the  Surveys 

At  the  beginning  of  this  study  of  the  product  liability 
problems  of  American  industry,  discussions  were  held  with  a 
number  of  trade  associations  and  other  interested  groups.  The 
purpose  of  these  discussions  was  to  gain  a  better  understanding 
of  industry's  product  liability  problems,  to  obtain  any 
information  that  these  groups  had  available,  and  to  explore  the 
feasibility  of  obtaining  additional  information  through  the 
cooperation  of  these  groups  and  their  members. 

Many  of  the  associations  were  acutely  aware  of  the  product 
liability  problems  of  their  members.  Some  had  already 
established  committees  or  panels  to  study  the  issue.  Several 
associations  had  also  begun  to  collect  data  on  insurance  costs, 
claims  and  suits  experience,  and  remedy  preferences  of  their 
members . 

As  a  result  of  these  discussions,  a  number  of  trade 
associations  and  other  interested  groups  provided  available 
information  to  the  Task  Force.  Some  groups  conducted  surveys  of 
their  members  with  the  objective  of  obtaining  additional 
information  for  their  own  use  and  for  the  consideration  of  the 
Product  Liability  Task  Force. 

A  total  of  21  groups  submitted  information  which  was  obtained 
from  surveys  and  studies  of  their  respective  memberships.  A  list 
of  participating  groups  and  the  types  of  information  provided  are 
shown  in  Table  III-17.  The  surveys  that  were  conducted  were 
designed    to   address   issues   of   particular   interest   to   the 


III-15 


mmmm 


individual  associations.  Therefore,  the  information  collected 
was  not  uniform.  However,  there  are  enough  common  elements  in 
these  studies  to  make  the  information  useful,  particularly  for 
comparison  with  data  from  other  sources  such  as  the  Insurance 
Study  and  the  telephone  survey  conducted  for  the  Task  Force  by 
contractors . 

The  response  rates  in  the  surveys  conducted  by  the  trade 
associations  and  other  groups  were  generally  quite  low,  ranging 
from  15  to  35  percent  in  most  cases.  In  many  instances  the 
returned  forms  were  incomplete,  indicating  either  an 
unavailability  of  data  or  an  unwillingness  to  respond  to  some 
questions.  Also,  since  firms  participated  voluntarily  in  these 
surveys,  it  may  be  that  those  returning  completed  questionnaires 
had  a  greater  interest  in  the  product  liability  issue  than  those 
not  responding.  Such  interest  could  indicate  a  greater  incidence 
of  product  liability  claims  or  larger  increases  in  insurance 
premiums  among  the  respondents.  The  same  type  of  bias  may  also 
be  reflected  in  the  telephone  survey  conducted  by  the  industry 
contractor,  although  to  a  lesser  degree  since  the  response  rate 
was  quite  high.  On  the  other  hand,  some  companies  with 
unfavorable  claims  experience  may  have  been  reluctant  to  disclose 
that  fact  because  of  potential  unfavorable  use  in  competition  or 
in  litigation. 

Characteristics  of  Respondents 

The  size  characteristics  of  the  respondents  to  the  trade 
association  surveys  are  summarized  in  Table  111-18.  While  the 
distribution  of  responding  firms  by  size  is  quite  uneven  from  one 
trade  association  to  another,  when  all  associations  are 
considered,  there  is  a  significant  representation  of  all  size 
categories  in  the  trade  association  surveys. 

The  size  of  the  responding  firm  was  not  available  from  all 
trade  association  surveys.  However,  for  those  surveys  where  this 
information  was  available,  the  total  distribution  of  respondents 
by  size  is  approximately  as  follows:  large--440,  medium--600, 
and  small — 1  ,800. 


III-16 


RESULTS 


Insurance    Coverage    and    Availability 


About  three- fourths  of  the  trade  association  surveys  asked 
respondents  whether  or  not  they  carried  product  liability 
insurance.  Those  firms  without  insurance  were  asked  to  indicate 
the  reason  for  not  carrying  product  liability  insurance.  The 
reasons  given  for  not  carrying  insurance  are  shown  in  Table  III- 
19. 

The  percentage  of  firms  not  carrying  product  liability 
insurance  ranged  from  0  to  21  percent  among  the  15  trade 
associations  reporting  information  on  this  question.  The  reasons 
for  not  carrying  insurance  were  varied,  but  the  largest  number  of 
firms  (56)  indicated  they  were  without  insurance  because  they  did 
not  need  it.  Another  3^  firms  indicated  they  were  self-insured. 
Of  the  remaining  firms  without  insurance,  32  stated  it  was  too 
expensive,  17  said  they  could  not  get  insurance  and  16  reported 
their    insurance    had    been    canceled. 

It  is  apparent  from  Table  III-19  that  the  industries  with  the 
highest  percentages  of  uninsured  firms  are  those  predominantly 
made    up   of   smaller    firms. 

Cost    of    Insurance    and    Claims    in    the    Selected    Industries 

Most  of  the  trade  association  surveys  asked  detailed 
questions  about  the  types  of  product  liability  insurance  carried, 
the  cost  of  product  liability  insurance,  limits  of  liability,  and 
deductibles.  In  most  cases  this  information  was  requested  for 
each  year  from  1971  or  1972  to  1975  or  1976.  The  annual 
information  made  it  possible  to  examine  the  trends  that  were 
developing  with  respect  to  product  liability  insurance  costs  and 
insurance    coverage. 

The  surveys  also  requested  detailed  information  on  the 
product  liability  claims  experience  of  the  responding  firms. 
This  information  included  the  number  of  new  claims  filed  each 
year  and  the  amount  of  damages  sought  in  those  claims. 
Information      was    also    requested    on    the    number    of   claims    and    suits 


III-17 


dropped,    the    number    settled    out      of      court, 
damages    paid    in    out-of-court    settlements. 


and      the      amount      of 


Information  was  also  reported  on  the  product  liability  suits 
actually  adjudicated.  This  information  included  the  number  of 
cases  won  and  lost  by  the  reporting  firms  and  the  amounts  of 
court    judgments    paid    to    the    plaintiffs. 

The  information  on  claims  and  suits  was  generally  reported 
for  the  same  time  period  as  the  information  on  insurance  costs 
and  coverage.  Most  surveys  also  included  reports  on  the  number 
of  claims  and  suits  pending  at  the  end  of  each  year  and  the  total 
amount   of   damages    sought    in    the    pending    suits    and    claims. 

This  section  summarizes  the  information  collected  on  product 
liability  insurance  and  product  liability  claims  by  trade 
associations  in  the  product  categories  designated  for  study  by 
the  Task  Force.  The  results  of  the  trade  association  surveys  are 
grouped  according  to  (1)  products  with  workplace  impact  and  (2) 
products  with  consumer  impact.  The  results  of  surveys  conducted 
by  trade  associations  in  other  product  areas  and  surveys  by  other 
types   of   organizations    are    summarized    below   in    the    next      section. 

Products   With    Workplace    Impact 

American  Textile  Machinery  Association. --This  survey  includes 
useable  responses  from  46  firms.  Of  those  firms,  44  reported 
carrying  product  liability  insurance.  Insurance  cost  and  claims 
data  were  reported  for  the  years  1974  to  1976.  Reported 
insurance    costs   by   size    of    firm    are    shown    in    Table    III-20. 

Several       important      points    clearly    stand    out    from    these    data. 

First,  the  cost  of  insurance  for  small  firms  is  very  much  higher 
-  than      for      larger      firms.         Second,      the      percentage    increases    in 

insurance    costs    also    were   much    higher    for    the      small      firms      than 

for  the  large  firms,  and  they  occurred  a  year  sooner.  Third,  the 
'    average      annual      increases      in      insurance      costs      for      all      firms 

reporting  were  very  large--568  percent  in  1975  and  55  percent  in 
\    1976. 

There  was  no  significant  change  in  the  number  of  new  claims 
filed    during    the    1974-76    period.       However,      both      the      number      of 


III-18 


pending  claims  and  the  amount  of  damages  sought  in  pending  claims 
increased  substantially  since  197^.  The  claims  experience  of  the 
reporting  firms  is  shown  in  Table  III-21.  The  data  for  1976 
represent  only  part  of  the  year.  No  court  judgments  were 
reported    during    this    period. 

Industrial  Heating  Equipment  Assoc iation.--Fi ft y-three  firms 
out  of  204  firms  surveyed  responded  to  this  survey.  Of  these,  49 
reported  carrying  product  liability  insurance.  Insurance  cost 
and  claims  data  were  reported  for  the  years  1971  to  1975. 
Reported  insurance  costs  by  size  of  firms  are  shown  in  Table  III- 
22. 

Insurance  costs  for  all  firms  more  than  doubled  during  the 
five-year  period  from  1971  to  1975.  The  largest  increase 
occurred  between  1974  and  1975  when  the  average  rate  increased  by 
54  percent.  From  1971  to  1974  the  average  annual  increase  was 
about  10  percent.  Both  the  rates  and  the  percentage  increases 
were    higher    for    the    small    firms    than    for    the    large    firms. 

The  limits  of  liability  for  primary  coverage  did  not  change 
significantly  during  the  1971-75  period.  Although  there  was  a 
moderate  decrease  in  the  average  for  all  firms,  the  detailed 
analysis  shows  that  the  average  limits  increased  slightly  for 
small  and  medium-sized  firms  and  decreased  slightly  for  large 
firms . 

The  average  size  of  deductibles  and  the  number  of  firms 
reporting  deductibles  increased  somewhat  during  the  five-year 
period.  In  1971,  only  one  firm  reported  a  deductible  of  $10,000. 
From  1972  to  1974,  three  firms  reported  deductibles  averaging 
$16,700.  In  1975,  eight  firms  reported  deductibles  averaging 
$12,600. 

Thirty-six  of  the  firms  reporting  indicated  that  they  had 
umbrella  coverage,  either  in  addition  to  primary  coverage  or 
instead  of  primary  coverage.  The  total  cost  of  umbrella  coverage 
for  the  large  firms  increased  about  60  percent  from  1971  to  1975. 
The  average  limits  of  liability  increased  by  about  the  same 
amount.  For  the  medium-sized  firms  the  cost  of  umbrella 
insurance  more  than  doubled  while  the  average  limits  of  liability 
increased    about    20   percent.      For      the      small      firms      the      average 


III-19 


reported  costs  varied  greatly  from  year  to  year  because  one  firm 
in  1971  and  another  in  1973  reported  extremely  high  costs. 
However,  if  these  firms  are  excluded,  average  costs  increased 
steadily  from  $767  in  1971  to  $4,9^6  in  1975.  The  limits  of 
liability    increased    by    30   percent   during    this    period. 

Twenty-two  of  the  companies  experienced  product  liability 
claims  or  suits  during  the  1971-75  period.  The  number  of  new 
claims  filed  about  doubled  during  the  period.  However,  the 
amount  of  damages  sought  in  new  and  pending  claims  increased  very 
sharply.  The  claims  experience  of  reporting  firms  is  shown  in 
Table    III-23. 

n 

Machinery  and  All ied  Products  Institute .  --This  survey 
produced  210  responses  across  a  broad  range  of  industries,  with  a 
primary  concentration  in  the  capital  goods  industries.  This  was 
a  very  extensive  survey  which  covered  a  wider  range  of  issues 
than  most.  The  main  findings  in  the  insurance  and  claims  areas 
are  summarized  below: 

•  There  was  a  sharp  rise  in  both  the  number  and  dollar 
amount  of  product  liability  claims  during  the  last 
decade.  For  the  period  from  1970  through  1975,  156 
companies  reported  product  liability  suits  filed  against 
them  in  the  amount  of  $828  million  as  expressed  in  terms 
of  plaintiffs'  demands.  At  the  end  of  this  period,  161 
companies  reported  that  over  $113  million  was  reserved 
by  insurance  carriers  for  pending  claims. 

•  Almost  all  respondents  carry  primary  product  liability 
insurance  coverage  and  excess  product  liability 
coverage.  The  majority  of  respondents  consider 
insurance  coverage  adequate,  but  nearly  half  consider 
the  cost  unreasonable. 

•  More  than  9^  percent  of  the  companies  indicated  that 
their  product  liability  premiums  and  other  costs  related 
to  product  liability  have  increased  during  the  past  five 
years.  The  increases  ranged  up  to  4,000  percent,  with 
58  percent  of  the  companies  reporting  increases  between 
100  percent  and  1,000  percent. 


111-20 


•     About  one-third  of  the  companies  were  required  to  accept 
large  deductibles. 

This  survey  was  widely  based  in  terms  of  the  size 
distribution  of  responding  firms.  Unlike  many  of  the  trade 
association  surveys,  which  included  a  predominant  number  of  small 
firms,  the  respondents  in  this  survey  were  more  evenly 
distributed  across  the  size  spectrum,  with  a  substantial  number 
of  very  large  firms.  The  distribution  of  respondents  is  shown 
below. 

Size  of  firms  responding  to  the  survey: 

Size  of  Sales  No .  of  Firms 

Under  $10  million  25 

$10  to  $50  million  53 

$50  to  $100  million  29 

$100  to  $500  million  59 

$500  million  to  $1  billion  18 

$1  billion  and  over  26 


Total  210 

Product  liability  insurance  costs  as  a  percentage  of  sales  is 
one  of  the  questions  addressed  in  this  survey.  More  than  half  of 
the  companies  responding  to  this  question  indicated  that  product 
liability  insurance  costs  were  in  the  range  of  0.1  percent  to  0.9 
percent  of  total  sales.  A  summary  of  the  distribution  of 
insurance  costs  as  a  percent  of  sales  is  shown  below. 

Product  liability  insurance  costs  as 
a  percentage  of  sales: 

Percentage  Range  No.  of  Firms 

Less  than  .01  percent 
.01  percent  through  .09  percent 
.1  percent  through  .9  percent 
1.0  percent  through  1.9  percent 
2.0  percent  through  2.9  percent 
3.0  percent  and  above 

Total  177 


111-21 


19 

29 

105 

17 

4 

3 

This  survey  included  questions  about  the  total  costs  related 
to  product  liability.  Costs  in  this  category  include  costs  of 
insurance,  uninsured  costs  of  payments  to  others,  and  internal 
costs  not  covered  by  insurance.  The  percentage  increase  in  the 
total  amount  of  such  costs  during  the  last  five  years  was 
reported  by  159  firms.  The  distribution  of  the  percentage 
increases  is  as  follows. 

Percentage  increase  in  costs  related  to 
product  liability  from  1970  to  1975: 


Per c entag e  Range 


0 


No .  of  Firms 


Less  than  10  percent 
10  percent  through  24.9  percent 
25  percent  through  49.9  percent 
50  percent  through  99.9  percent 
100  percent  through  199.9  percent 
200  percent  through  499.9  percent 
500  percent  through  999-9  percent 
1,000  percent  through  1,999  percent 
2,000  percent  through  3,999  percent 
4,000  and  above 
Total 


10 

1 

7 

13 

16 

34 

27 

32 

13 

3 

3 

159 


Almost  50  percent  of  the  firms  reporting  experienced  product 
liability  cost  increases  of  200  percent  or  more  during  the  five- 
year  period.  While  comparable  information  is  not  available  for 
insurance  costs  alone,  it  is  apparent  from  related  questions  that 
the  bulk  of  the  costs  reported  on  in  the  above  question  consist 
of  product  liability  insurance  premiums. 

The  survey  asked  a  number  of  questions  concerning  experience 
with  product  liability  suits  and  claims  during  the  past  five 
years.  The  responses  to  those  questions  are  summarized  in  Table 
111-24. 

The  survey  requested  information  on  the  total  amount  and 
number  of  claims  paid  and  reserved  for  selected  years  since  1965. 
This  information  is  presented  below. 


111-22 


Total    claims    paid    and    reserved    for    selected    years: 


Year 


Number 


Amount 


No.    of   Firms 


1965 
1970 
1973 
1975 


6,6^1 

7,084 

1 1 , 182 

9,865 


$11 ,490,971 
51  ,414,421 
76,250, 157 
81 ,236,281 


159 
192 
193 
191 


The  increase  in  the  number  and  amount  of  claims  between  1965 
and  1970  may  be  partly  explained  by  the  increase  in  the  number  of 
firms  reporting  in  1970.  A  number  of  respondents  no  longer  had 
records  for  1965.  However,  the  increasing  trend  in  both  the 
number  and  amount  of  claims  is  unmistakable.  In  addition,  the 
figures  for  1975  are  still  incomplete  since  many  claims  are  not 
reported    until    several    years    after    the    accident. 

While      the  number      of   claims   has   been    rising    over    the    years, 

the    size   of   the  claims   has    also      been      increasing.         The      average 

claim      in      1965  was      $1,730.      This    figure    increased    to   $7,258    in 

1970,    $6,819    in  1973,    and    $8,234    in    1975.         The      distribution      of 

claims    paid    and  reserved    during    this    period    is    shown    below. 

Distribution    of   claims    paid    and    reserved,    by   size: 


Number    of   Claims    Paid    and    Reserved 


Si  ze    of   Claims 

Under  $1 , 000 
$1 ,000  to  $10,000 
$10,000  to  $100,000 
$100,000  to  $500,000 
$500,000  to  $1  million 
Over  $1  million 


1965 

1970 

1973 

1975 

4,285 

4,  181 

4,492 

2,584 

906 

1  ,476 

1  ,898 

1,291 

195 

530 

849 

492 

19 

64 

169 

90 

2 

11 

15 

41 

0 

4 

17 

1  1 

Again ,   it 
incomplete . 


should   be  noted  that  the  data  for  1975  are  still 


National  Machine  Tool  Builders  Association. --This  survey 
included  a  total  of  60  responses  distributed  fairly  evenly  across 
all  size  categories.  Detailed  data  on  the  cost  of  product 
liability  insurance  are  available  only   for   1976.    The   average 


I II -23 


cost  per  thousand  dollars  of  sales  for  all  firms  was  $7.23.  This 
represents  an  increase  of  89  percent  from  1975  and  233  percent 
from  1972.  The  cost  distribution  by  size  of  firm  in  1976  is 
shown    below. 

J   Product    liability    insur ance--cost    per    thousand 
dollars   of   sales    in    1976: 


Si  ze    of   Sales 

Under  $2.5  million 
$2.5  to  $5.0  million 
$5.0  to  $7.5  million 
$7.5  to  $15  million 
$15  to  $50  million 
$50  million  and  over 


Average  Cost 


No .    of   Firms 


$    7.51 

15 

6.48 

14 

19.16 

7 

12.30 

7 

3.48 

9 

2.68 

8 

This  survey  shows  the  highest  rates  for  product  liability 
insurance  being  paid  by  the  small-  to  medium-sized  companies, 
with    the    rates    substantially    lower    for    the    largest    firms. 

The  60  responding  firms  reported  a  total  of  771  product 
liability  claims  since  1970.  In  1975  there  were  166  claims  and 
in  1976,  up  to  the  time  of  the  survey,  there  were  67  claims.  Out 
of  the  total  claims  filed,  186  were  dropped  and  145  were  settled 
out  of  court.  The  average  cost  of  out-of-court  settlements  was 
$18,000    per    claim. 

The  judicial  process  was  completed  at  the  time  of  reporting 
for  58  of  the  claims  filed  during  the  1970-76  period.  Of  the  58 
suits,  42  were  won  by  the  defendants  and  16  by  the  plaintiffs. 
The    average    amount   of   the    court   judgments    was   $256,000. 

Twenty-eight  of  the  companies  reporting  had  no  product 
liability  claims  pending.  The  32  companies  with  pending  claims 
reported    a    total    of    436    claims    pending. 

Railway  Progress  Institute . --The  members  of  this  association 
produce  virtually  all  the  equipment  used  by  the  nation's 
railroads.  Questionnaires  were  sent  to  86  manufacturing  firms. 
Thirteen  firms  responded  for  a  response  rate  of  15  percent. 
However,    these    firms    represent    about    30   percent   of   the    industry's 


III-24 


sales.  The  size  distribution  of  the  responding  firms  was  as 
follows:  under  $50  million  in  sales — 3  firms;  $50  to  $100 
million —    4    firms;    and    over    $100   million--6    firms. 

All  13  of  the  responding  firms  reported  carrying  primary 
product  liability  insurance  and  umbrella  coverage.  The  cost  per 
thousand  dollars  of  sales  for  primary  product  liability  insurance 
is    shown    below. 

Product    liability    insur ance--average    annual    cost 
per    thousand    dollars   of   sales: 


Year 


Average   Cost 


No.    of   Firms 


1975 
1974 
1973 
1972 
1971 
1970 


$  .90 
.74 
.75 
.73 
.77 
.49 


The  cost  of  product  liability  insurance  increased  by  84 
percent  during  the  period  from  1970  to  1975,  or  at  an  average 
rate  of  about  13  percent  a  year.  During  the  same  period  the 
limits  of  liability  increased  somewhat,  from  $630,000  in  1970  to 
$725,000  in  1975.  The  average  amount  of  deductibles  also 
increased  substantially,  from  $39,000  in  1970  to  $118,000  in 
1975,  while  the  number  of  firms  reporting  deductibles  rose  from 
five    to    seven  . 

The  average  cost  of  umbrella  coverage  also  increased 
steadily,  from  $15,300  in  1970  to  $26,300  in  1975.  The  average 
limits  of  liability  rose  from  about  $25  million  to  $34  million 
during    the    same    period. 

Nine  of  the  responding  firms  indicated  that  they  had 
experienced  one  or  more  product  liability  claims  since  1970. 
However,  only  five  firms  were  able  to  provide  any  detailed 
information  on  the  number  of  claims  filed  and  the  amount  of 
damages  sought.  The  claims  experience  for  those  firms  is  shown 
in    Table    III-25. 


III-25 


Woodworking  Machinery  Manufacturers  of  America . — A  total  of 
46  companies  responded  to  the  survey.  Thirty-nine  of  these  firms 
reported  that  they  were  engaged  in  manufacturing  capital  goods 
while  four  firms  reported  they  manufacture  consumer  goods. 
Thirty-eight  of  the  firms  also  reported  that  they  sell  or 
distribute  capital  goods  and  eight  firms  distribute  consumer 
goods.  The  reporting  firms  estimated  that  95  percent  of  their 
product    liability   claims    arise    from   manufacturing    operations. 

Most  of  the  firms  reporting  in  this  survey  were  in  the  small- 
to  medium-sized  category.  Of  the  44  firms  indicating  their  size 
of  sales,  31  had  sales  of  less  than  $5  million  and  five  firms  had 
sales  between  $5  and  $10  million.  Four  companies  were  in  the  $10 
to  $24  million  category,  three  companies  in  the  $25  to  $99 
million    group,    and    one    firm    had    sales   of  over    $100   million. 

Product  liability  insurance  costs  were  reported  both  for 
primary  coverage  and  for  excess  coverage.  Insurance  costs  were 
reported  only  on  a  cost  per  firm  basis  rather  than  cost  per 
thousand  dollars  of  sales.  Average  insurance  costs  per  firm  are 
shown    in    Table    III-26. 

The  average  cost  of  primary  product  liability  insurance 
increased  about  tenfold  between  1971  and  1976.  This  represents 
an  average  annual  rate  of  increase  of  nearly  60  percent  during 
this  period.  Since  1974  the  average  cost  per  firm  has  increased 
by   a    total    of    445    percent. 

The  cost      of   excess   coverage   has    increased    nearly   as  much   as 

the    cost  of      primary      coverage.         However,      the      average      dollar 

amounts  for      excess      coverage      are   considerably    smaller    than    for 

primary  coverage      and      the      number      of      firms      reporting      excess 

coverage  is    also    smaller. 

The  average  limits  of  liability  increased  somewhat  during  the 
1971-76  period.  Average  deductibles  also  increased  during  this 
period  but  were  still  quite  low  at  $2,030  per  firm  for  the  five 
firms  reporting  deductibles.  Three  firms  also  reported  self- 
insured    retention    levels    averaging    $8,333    in    1976. 


111-26 


Product  liability  insurance  costs  as  a  percentage  of  sales 
were  also  reported  in  this  survey.  The  reported  average 
percentage      rose    from    0.3    percent    in    1972    to    0.9    percent    in    1976. 

The  number  of  product  liability  claims  filed  and  the  amount 
of  damages  sought  increased  substantially  during  the  period  from 
1971  to  1975.  Data  were  also  reported  for  1976  but  are  still 
incomplete.  The  claims  experience  for  reporting  firms  is  shown 
below. 

Woodworking  Machinery  Distributors  Association. --Thirty-two 
firms  responded  to  this  survey.  Insurance  coverage  and  cost  data 
were  provided  for  1971  and  1976.  Insurance  information  was 
requested  in  the  survey  for  general  liability  coverage  and  for 
umbrella  coverage.  Thirty  firms  reported  carrying  general 
liability  while  two  firms  carry  only  umbrella  coverage.  Average 
insurance   costs    and    coverage    are    shown    below. 

General    liability    insur ance--average   cost    and 
limits    per    firm: 

Year  Average   Cost  No .    of   Firms  Average   Limits 


1976 
1971 


$3,652 
924 


30 
20 


$515,000 
297,000 


Umbrella   coverage--average   cost    and 
limits    per    firm: 


Year  Average   Cost  No .    of   Firms  Average   Limits 


1976 

$1 

,886 

12 

$1 

,144 

000 

1971 

384 

6 

1 

J43 

000 

The  average  cost  of  general  liability  insurance  increased 
fourfold  between  1971  and  1976.  This  represents  an  average 
annual  rate  of  increase  of  32  percent.  The  average  limits  of 
liability    increased    about    75    percent   during    this    same    period. 

The  average  cost  of  umbrella  coverage,  while  only  about  half 
as  much  as  general  liability  coverage  per  firm,  increased  at  a 
faster      rate.      The    average   cost    rose    nearly    fivefold    between    1971 


111-27 


and    1975,    while      the      limits      of      coverage      remained      essentially 
unchanged  . 

Deductibles  for  general  liability  were  reported  by  seven 
firms  in  1976.  The  average  amount  was  $3,336.  In  1971,  one  firm 
reported    a   deductible   of   $1,000. 

Product  liability  claims  paid  during  the  period  from  1971  to 
1976  were  reported  by  six  firms.  Nine  claims  were  paid  for  a 
total    amount   of   $19^,650,    or    an    average   of   $21,628    per    claim. 

There  were  also  nine  claims  pending  in  1976  among  six  firms. 
The  total  amount  of  damages  sought  in  pending  claims  was 
$2,035,000,    an    average   of   $226,111    per    claim. 

Grind  ing  Wheel  Institute  . — The  nature  of  the  responses  to 
this  survey  made  it  impossible  to  present  a  complete  tabulation 
of  the  results.  However,  a  summary  of  the  results  was  provided 
as    follows : 

•  Respondents  represent  over  70  percent  of  the  dollar 
volume   of   bonded    abrasives  manufactured    in    the    U.S. 

•  The  total  number  of  product  liability  claims  was  75 
percent  greater  in  1975  than  in  1970.  The  large-  and 
medium-sized  companies  experienced  a  58  percent  increase 
in  the  number  of  claims  during  the  1970-75  period  while 
small    companies   had    a    350    percent    increase. 

•  The  total  number  of  claims  that  were  litigated  increased 
uniformly  in  the  industry  by  375  percent  during  the 
1970-75    period. 

•  There  appears  to  be  no  trend  in  court  judgments  against 
the  manufacturers. 

•  The  average  cost  of  product  liability  coverage  increased 
by  185  percent  from  1970  to  1975.  The  median  increase 
was  113  percent.  Several  companies,  primarily  small 
firms,  reported  an  additional  average  increase  in 
premiums  of  198  percent  from  1975  to  1976.  One  company 
reported    a    tenfold    increase    from    $8,000    to    $80,000. 


I 11-2  8 


Society  of  the  Plastics  Industry . — There  were  366  respondents 
to  this  survey  out  of  about  1,100  members  of  the  association. 
Responses  were  received  from  processors,  material  suppliers,  mold 
and  tool  makers,  and  machinery  manufacturers.  The  size  of  the 
responding  companies  covered  a  wide  range  from  under  $5  million 
in  sales  to  over  $500  million.  However,  most  of  the  companies 
were  in  the  small-  to  medium-sized  category.  The  distribution  of 
respondents  by  size  and  type  of  product  is  shown  below. 

Size  and  type  of  firms  responding  to  the  survey: 

Type  of  Company        


Size  of 

sal  es 

Ma 

ter  ial 

Mold  and 

Mach 

iner 

y 

(millions) 

Processor 

Su 

ppl ier 

Toolmaker 

Manu 

fact 

ur  er 

Total 

Under  $5 

136 

21 

26 

57 

240 

$5  to  $10 

27 

4 

2 

4 

37 

$10  to  $25 

20 

5 

1 

15 

41 

$25  to  $50 

9 

2 

1 

3 

15 

$50  to  $100 

3 

5 

-- 

2 

10 

$100  to  $500 

4 

12 

-- 

1 

17 

Over  $500 

1 

4 

-- 

1 

6 

Totals 

200 

53 

30 

83 

366 

About  88  percent  of  the  companies  reported  that  they  carry 
product  liability  insurance.  Of  these,  about  84  percent  carry 
primary  and  umbrella  coverage  with  the  remainder  carrying  primary 
coverage  only.  The  pattern  of  coverage  is  similar  for  all  types 
of  companies. 

The  information  on  insurance  costs  was  not  tabulated  by  size 
of  firm  but  was  tabulated  by  type  of  company. 

The  reported  costs  for  primary  product  liability  insurance 
coverage  are  shown  in  Table  111-28.  Average  costs  were  computed 
only  for  all  respondents  while  median  costs  were  tabulated  by 
type  of  firm  as  well  as  for  all  respondents. 

The  average  cost  of  primary  product  liability  insurance  for 
all  respondents  increased  by  about  224  percent  from  1970  to  1976. 
This   represents   an   average  annual  rate  of  increase  of  about  22 


I II -2 9 


percent  a  year.  The  largest  increases  took  place  during  the  last 
two  years.  Since  197^  the  average  cost  has  increased  178 
percent . 

The  median  costs  of  primary  insurance  coverage  are 
substantially  lower  than  the  average  cost.  However,  the 
percentage  increases  were  about  the  same.  Median  costs  rose  by 
230  percent  between  1970  and  1976  and  by  141  percent  since   1974. 

Median  insurance  costs  rose  more  for  some  types  of  the 
reporting  companies  than  for  others.  The  largest  increases  for 
the  entire  1970-76  period  were  experienced  by  the  machinery 
manufacturers.  Their  median  costs  rose  by  410  percent.  The 
lowest  percentage  increase  was  experienced  by  processors  who  had 
a  117  percent  increase.  Material  suppliers  had  a  290  percent 
increase  and  mold  and  tool  makers  had  a  240  percent  increase. 
During  the  last  two  years  the  increases  ranged  from  118  percent 
to  190  percent. 

There  were  no  significant  changes  in  the  limits  of  liability 
for  primary  coverage  during  the  last  six  years.  The  average  for 
all  respondents  increased  slightly,  from  $2.2  million  in  1970  to 
$2.8  million  in  1976.  The  median  for  all  firms  increased  to 
$500,000  in  1976  from  $300,000  in  all  the  previous  years.  The 
median  figures  for  the  various  types  of  respondents  all  followed 
the    same   general    pattern. 

Deductible  provisions  were  reported  by  55  companies,  or 
slightly  less  than  one-fifth  of  the  companies  reporting  in  1976. 
In  1970,  20  companies,  or  about  17  percent  reported  deductibles. 
The  average  amount  of  deductibles  fluctuated  from  year  to  year. 
The  average  was  $64,300  in  1970  and  $74,328  in  1976.  The  median 
amount    was    $5,000    in    both    years. 

Umbrella  coverage  was  reported  by  197  firms  in  1976.  The 
number  of  firms  reporting  such  coverage  has  increased  steadily 
from  52  in  1970.  The  average  cost  for  umbrella  coverage  rose 
from  $6,418  in  1970  to  $34,078  in  1976.  This  represents  an 
increase  of  430  percent  during  the  six-year  period.  The  limits 
of  liability  for  umbrella  coverage  decreased  slightly  from  $10.8 
million    in    1970    to    $9.2   million    in    1976. 


III-30 


About  35  percent  of  the  respondents  had  product  liability 
claims  or  suits  during  the  1970-76  period.  However,  the 
percentage  varied  considerably  by  type  of  company.  These 
percentages  were:  66  percent  for  material  suppliers,  54  percent 
for  machinery  manufacturers,  23  percent  for  processors,  and  10 
percent    for   mold    and    tool   makers. 

The  claims  experience  for  all  respondents  is  summarized  in 
Table    111-29. 

Cast  Metal s  Federation . — A  total  of  195  firms  responded  out 
of  810  firms  that  were  surveyed.  Of  those  responding,  165 
reported  that  they  carry  product  liability  insurance  and  30 
indicated  that  they  have  no  insurance.  Primary  and  umbrella 
coverage  are  carried  by  142  firms  while  23  firms  have  only 
primary  coverage.  Reported  insurance  costs  by  size  of  firms  are 
shown    in    Table    111-30. 

Insurance  costs  for  all  firms  increased  by  173  percent 
between  1971  and  1976.  The  largest  increases  took  place  between 
1974  and  1976.  The  increases  in  this  period  alone  amounted  to 
155  percent.  The  increases  in  insurance  rates  in  this  industry 
are  fairly  uniform  across  all  size  groups.  The  rates  are 
slightly  lower  for  the  larger  firms  than  for  the  small-  to 
medium-sized  firms.  However,  the  differences  are  much  less 
pronounced    than    in   most    industries    studied. 

The  limits  of  liability  increased  for  all  size  categories 
between  1971  and  1976.  The  average  increase  for  all  firms  was  48 
percent . 

Deductibles  also  increased  during  the  six-year  period. 
Fifteen  firms  reported  an  average  deductible  of  $3,000  in  1971, 
while  27  firms  reported  an  average  of  $6,590  in  1976.  This 
industry  is  peculiar  in  that  the  small  to  medium  firms  reported 
higher  average  deductibles  than  the  large  firms.  In  1976,  eight 
small  firms  reported  an  average  deductible  of  $9,300,  while  six 
medium  firms  reported  an  average  of  $8,800,  and  13  of  the  larger 
firms    reported    an    average   of   $3,900. 


III-31 


The  limits  of  liability  for  umbrella  coverage  increased  for 
all  size  categories  between  1971  and  1976.  The  average  increase 
for    all    firms    was    about    75    percent. 

Total  product  liability  costs  as  a  percentage  of  sales  were 
reported  in  this  survey.  The  average  percentage  increased  from 
0.13  percent  in  1971  to  0.48  percent  in  1976.  The  percentages  in 
1976  were:  0.33  percent  for  small  firms,  0.38  percent  for  medium 
firms,  and  .77  percent  for  the  larger  firms  with  sales  over  $10 
mill  ion    a    year . 

Thirty-eight  companies  had  product  liability  claims  during 
the  1971-75  period.  Both  the  number  of  new  claims  and  the  amount 
of  damages  sought  increased  sharply  during  this  period.  The 
claims   experience   of   the    reporting    firms    is    summarized      in      Table 

III-31 . 

American  Die  Casting  Institute  . — The  Institute  membership  is 
of  two  types,  regular  members  who  are  engaged  in  producing  metal 
casting  specialties,  and  affiliate  members  who  deal  in  related 
products.  There  were  52  respondents  to  the  survey  who  answered 
one  or  more  questions.  Eight  of  these  were  affiliate  members. 
The  distribution  of  respondents  by  size  and  type  is  shown  below. 
Size  and  type  of  firms  responding  to  the  survey: 


Si  ze  of  Sales 

Under    $5    million 
$5    to    $50    million 
$50    to    $100    million 
Over    $100   million 


Members 

Affi 

lia 

tes 

Total 

27 

4 

31 

16 

1 

17 

1 

0 

1 

0 

3 

3 

Forty-two  of  the  firms  reported  that  they  carry  product 
liability  insurance.  Cost  information  was  reported  on  the  basis 
of  total  premium  costs  per  firm  rather  than  cost  per  thousand 
dollars  of  sales.  Premium  costs  for  umbrella  coverage  were  also 
reported.  Average  insurance  costs  per  firm  are  summarized  in 
Table    III-32. 

This  table  primarily  reflects  the  experience  of  regular 
members  since  it  includes  data  from  only  one  affiliate  member. 
The    average   cost   of   primary    product    liability    insurance    increased 


III-32 


by  97  percent  between  1971  and  1975.  The  increase  in  1975  was  23 
percent.  The  average  cost  of  umbrella  coverage  increased  by  56 
percent   during    the    five-year    period. 

No  deductibles  were  reported  on  product  liability  insurance 
until    1975,    when    five    firms   reported    deductibles. 

The  product  liability  claims  experience  of  the  reporting 
firms  was  relatively  limited.  One  member  firm  reported  a  suit 
for  $105,000  in  1971  but  did  not  indicate  its  disposition.  Two 
firms  reported  one  claim  each  in  1972,  one  of  which  was  dropped 
and  the  other  settled  out  of  court.  The  latter  claim  was  for 
$1.5  million  and  was  settled  for  $47,000.  One  firm  reported  a 
claim  in  197^  for  $10,000  but  no  disposition  was  indicated.  Two 
of  the  affiliates  reported  that  they  had  a  number  of  claims  but 
no    specific    information    was    provided. 

Products   With    Consumer    Impact 

The  Automotive  Parts  and  Accessories  Association  ,  Inc  .--Thi  s 
survey  of  1,100  member  firms  engaged  in  the  manufacture, 
distribution  and  sales  of  automotive  after-market  products 
includes        responses  from  105  manufacturers  and  14 

distributor/retailers. 

In  the  area  of  insurance  costs,  all  but  four  respondents 
indicated  that  their  insurance  premiums  had  increased  by  large 
increments.  Percentage      increases      over      the      last      year      were 

reported  by  52  firms  and  averaged  about  200  percent.  Increases 
ranged    from    10    percent    to    1,000    percent. 

The  total  average  increase  over  the  last  five  years  was 
reported  to  be  about  3^0  percent  for  the  36  firms  reporting, 
indicating  that  increases  on  the  order  of  45  percent  annually 
were    experienced    from    1971    to    1975. 


General      information      was      also      collected 
trends   of   claims    and    suits    as    follows: 


on    the    source    and 


73         of         105      firms      reporting      indicated      that      claims 
typically      arose      from      purchasers      of      products.  All 

distributors    indicated    this    was    the    case. 


III-33 


•  28  of  105  firms  indicated  the  claim  was  typically  a 
third-party  action,  while  only  four  cited  a  Worker 
Compensation  claim  as  being  typical. 

•  About  50  percent  of  the  firms  indicated  an  increase  in 
both  the  number  and  size  of  claims  over  the  last  five 
years.  About  22  percent  indicated  a  claims  decrease. 
Somewhat  less  than  30  percent  stated  that  the  number  and 
size  of  claims  had  remained  the  same. 

Recreational  Vehicle  Industry  Association  . — The  information 
was  collected  and  subsequently  compiled  in  September  1976.  It 
dealt  with  insurance  costs,  deductibles  or  self-retention  levels, 
and  certain  aspects  of  legal  defense  and  settlement  costs. 

No  stratification  by  firm  size  was  attempted;  however,  a 
distinction  was  made  between  manufacturers  (48  responses)  and 
suppliers  (19  responses).  The  number  of  responses  concerning 
insurance  premiums  exceeded  27  firms,  but  the  exact  number 
reporting  is  not  indicated  specifically.  Reported  insurance 
costs  during  the  six  years  from  1971  to  1976  for  manufacturers 
and  suppliers  are  shown  in  Table  III-33. 

A  generally  stable  or  slightly  increasing  pattern  is  shown 
for  the  period  1971-74.  During  the  1974-76  period  the  average 
cost  of  insurance  increased  by  91  percent  for  manufacturers  and 
196  percent  for  suppliers. 

Claim  trends  were  not  reported  for  the  entire  survey. 
However,  information  on  losses,  by  year,  was  reported  by  several 
firms.  Generally,  no  trends  in  losses  are  apparent.  High 
average  losses  were  sustained  in  1974  as  a  result  of  one  large 
settlement . 

General  Av  iation  Manufacturers  Assoc  iation  . — This  trade 
association  represents  35  companies  which  manufacture  over  90 
percent  of  all  general  aviation  aircraft,  engines,  avionics, 
pilot  supplies  and  components.  Member  firms  with  general 
aviation  sales  in  the  $2.5  million  to  $100  million  category 
predominate  (21  companies).  Eight  firms  have  sales  of  less  than 
$2.5  million  and  six  are  in  the  over  $100  million  category. 


III-34 


All  GAMA  member  companies  carry  product  liability  insurance, 
normally  purchased  as  a  separate  package.  Most  firms  purchase 
from  one  of  two  U.S.  insurance  pools  or  from  the  London  market. 
It  is  estimated  from  industry  surveys  that  the  cost  of  insurance 
rose  from  $3.55  to  $21.10  per  thousand  dollars  of  general 
aviation  sales  between  1969  and  1973-  This  represents  an 
increase   of  nearly    500   percent,    or    about   55    percent   a    year. 

Three  of  the  member  firms  have  reported  increases  for  the 
period  1971  to  1975  ranging  from  360  percent  to  1,100  percent. 
No    information    was    available   on    limits   of   liability. 

Some  claims  information  was  also  presented  for  the  years  1964 
through    1973    as    follows: 

o  More      new      claims      are      being      filed      each      year    and    for 

greater  amounts.  In  1973,  253  new  claims  were  filed 
compared    to    93    claims    in    1964. 

o  Pending      claims   have    also    increased    many    fold,    from    3    in 

1964  to  224  in  1973-  About  50  percent  of  the  claims  are 
paid  out  in  the  third  to  fifth  year  after  they  are 
filed. 

Heal th  Industries  Manufacturers  Association. --In  February 
1976,  the  association  sent  a  questionnaire  to  160  member  firms 
requesting  information  on  each  firm's  experience  with  product 
liability  coverage.  Forty-eight  responses  were  received.  Only 
limited  information  was  obtained  concerning  premium  rates  and 
claims  history.  However,  it  is  reported  that  those  member  firms 
responding  experienced  a  213  percent  average  increase  in  premiums 
between  1975  and  1976.  Eleven  firms  also  reported  increased 
deductibles . 

American  Textile  Manufacturers  Institute ,  Inc  .--This  survey, 
conducted  and  analyzed  by  the  Economic  Information  Division  of 
the  ATMI,  includes  responses  from  148  textile  firms.  Product 
categories  include  industrial  fabrics,  apparel  fabrics,  home 
furnishings,  carpeting  and  hosiery.  It  is  estimated  that  the 
total  universe  of  textile  manufacturers  is  somewhat  less  than 
6,000,  with  most  firms  in  the  less  than  $5  million  sales 
category . 


III-35 


The  distribution  of  firms  by  size  of  sales  is  shown  below 
together  with  the  percentage  of  those  respondents  who  carry  some 
form  of  product  liability  insurance,  including  two  companies 
which    are    self-insured. 


Percentage   of    firms    with    product   liability 
insurance   coverage,    by   size    of   sales: 


Size  of  Sales 


Percentage  of  Responding 

Firms  with  Insurance    No.  of  Firms 


Under  $5  million 
$5  to  $10  million 
$10  to  $50  million 
$50  to  $100  million 
Over  $100  million 


50  percent 

14 

64  percent 

28 

84  percent 

59 

94  percent 

18 

100  percent 

29 

148 


The  above  table  illustrates  that  liability  protection  is  more 
prevalent  among  larger  companies  than  among  smaller  companies. 
This  trend  was  also  noted  in  the  telephone  survey  and  in  a  number 
of  other  trade  association  surveys.  Most  of  the  firms  which  are 
not  currently  insured  believe  they  do  not  need  insurance  (21  out 
of  27).  Six  respondents  indicated  that  insurance  was  too 
expensive  but  none  indicated  an  inability  to  obtain  insurance. 

Most  respondents  were  able  to  report  their  product  liability 
insurance  coverage  and  costs  separately  from  their  Comprehensive 
General  Liability  coverage.  These  data  indicate  that  product 
liability  insurance  premiums  doubled  between  1971  and  1975  for 
the  average  firm.  A  median  increase  of  124  percent  was  reported 
for  firms  below  $5  million  in  sales,  while  firms  with  sales  above 
$100  million  experienced  a  median  increase  of  67  percent. 
Subsequent  data  collected  for  1967  indicate  that  sharp  premium 
increases,  on  the  order  of  an  additional  100  percent  over  1975 
premiums,  had  occurred  or  were  expected  in  1976. 

Smaller  firms  in  the  survey  have  increased  their  limits  of 
liability  during  the  last  five  years,  but  the  large  firms 
responding  have  not.  With  the  exception  of  firms  with  sales 
below  $5  million,  deductibles  or  self-retention  levels  have  also 
increased,  particularly  for  large  firms. 


III-36 


Umbrella  or  excess  layering  of  insurance  was  used  more 
extensively  in  1975  than  1971  and  for  larger  amounts.  For 
example,  the  median  large  firm  increased  the  amount  of  its 
umbrella  coverage  from  $5  million  to  over  $22  million.  This 
trend  was  not  apparent  for  small  firms.  Generally,  the  cost 
increases  for  umbrella  coverage  experienced  over  the  five-year 
period  appear  to  be  in  direct  relation  to  increases  in  umbrella 
policy  coverage. 

Information  was  also  collected  in  this  survey  on  new  claims, 
pending  claims,  and  settlements.  Table  111-3^  shows  the  number 
of  companies  which  have  experienced  one  or  more  claims  since 
1970,  the  number  of  claims  pending  in  1970  and  1975,  and  damages 
sought  in  pending  claims  for  the  corresponding  2  years. 

This  table  illustrates  that  less  than  30  percent  of  the 
responding  firms  have  experienced  any  claims  or  suits  over  the 
last  five  years.  Half  of  the  firms  which  did  have  claims  are 
firms  which  have  extensive  product  exposure  with  sales  in  excess 
of  $100  million.  The  rising  trend  in  pending  claims  and  damages 
sought  is  very  apparent.  Survey  results  indicated  that  while  the 
number  of  new  claims  annually  has  not  increased  substantially 
since  1970,  a  large  number  of  the  claims  and  suits  are  still 
pending.  Over  90  percent  of  pending  claims  are  against  firms 
with  sales  in  excess  of  $100  million  annually. 

Damages  sought  in  pending  claims  have  increased  sharply  since 
1970,  both  on  a  total  basis  and  a  per  claim  basis.  For  example, 
the  average  amount  sought  per  claim  in  1970  was  $204,700.  By 
1975  the  amount  had  increased  to  over  a  million  dollars  per 
claim.  The  amount  of  damages  sought  per  claim  is  still  judged  to 
be  underestimated  by  ATMI  since  one  very  large  company  did  not 
report  its  pending  claims  and  a  number  of  other  claims  do  not  yet 
have  information  reported  on  the  amount  of  damages  sought. 

This  survey  also  provides  the  following  insights  with  respect 
to  court  actions  and  settlements  for  large  firms: 

•  For  12  large  firms  which  were  faced  with  149  law  suits, 
only  17  percent  of  the  suits  were  settled  through  court 
judgments   and   of   these,   only   half   were   won  by  the 


III-37 


plaintiff.   About  32  percent  were  otherwise  disposed 
and  slightly  over  half  are  still  pending. 


of 


•  The  average  cost  of  out-of-court  settlements  was  about 
$11,000.  Average  judgments  for  lost  court  cases 
approach  $20,000,  but  for  all  adjudicated  cases  (won  and 
lost)    the    average    is    less    than    $10,000. 

•  For  21  firms  responding,  the  average  amount  of  damages 
sought  per  claim  in  new  claims  filed  has  been  highly 
variable:  $636,000  in  1971,  $874,000  in  1973,  $588,000 
in  1975  and  $725,000  in  1976.  No  trends  are  apparent 
from  this  limited  sample.  Since  the  average  amount  of 
damages  sought  in  claims  and  suits  pending  in  1975  was 
in  excess  of  $1  million  per  claim,  but  the  average 
amount  per  new  claim  filed  during  the  1971-75  period  was 
substantially  less  than  $1  million,  it  appears  that  many 
of  the  large  claims  filed  since  1970  have  not  been 
settled . 

Cost    of    Insurance    and    Claims    in    Industries    and 
Organizations    Other    than    the    Selected    Industries 

Cal ifornia  Grain  and  Feed  Association .  --A  sampling  of  110 
firms  engaged  in  the  manufacture  and  distribution  of  complete 
livestock  and  poultry  feeds  and  ingredients  was  conducted  by  this 
association      in      October-November      1976.  Of        the        37        firms 

responding,  about  half  distribute  feed  to  the  consumer-buyers, 
nine  process  a  single  product  and  distribute  to  feed 
manufacturers  or  consumer-buyers,  and  the  remaining  nine  include 
brokerage  operations,  feed  supplement,  and  special  additive,  or 
seed  producers,  or  distributors.  About  fifty  percent  are  firms 
with  sales  under  $5  million  while  the  other  half  had  sales 
between    $5    and    $50    million. 


It      is      stated    by    the    Association,    which   analyzed    the    survey, 


that 


^  In      general    it    was    determined    that    there    is    an    extremely    wide 

''^~        variation       in      coverage      and       premium      costs      between       firms. 

Premiums    paid    seem    to    bear    little   or    no    correlation    to    claims 

filed    or    amounts    paid    out    to      settle      the      claims.         In       some 


III-38 


instances,  those  without  any  losses  experienced  the  greatest 
increases  in  premiums  for  their  product  liability  coverage, 
while  some  who  had  experienced  substantial  losses  had 
comparatively    little   or,    in    one   case,    no    increase. 

Examination  of  the  information  supporting  this  conclusion 
indicates  that  while  the  relationship  between  premiums  and 
claims/ settlements  is  obscure,  on  the  average,  small  firms  seem 
to  be  experiencing  fewer  claims  and  smaller  increases  in  premiums 
than    larger    firms. 

Eighty-three  percent  of  the  small  firms  surveyed  had  some 
form  of  product  liability  insurance.  For  those  firms  reporting, 
premium  increases  between  1973  and  1976  ranged  between  48  percent 
and  500  percent.  All  large  firms  were  insured.  Those  reporting 
indicated  premium  increases  for  the  same  three-year  period 
between  55  percent  and  1,800  percent,  with  several  reporting 
increases   in    the   400   percent   to    1,000   percent   range. 

Small       firms      experienced  only      one      claim      in    the    five-year 

period    ending    in    1976.       Larger  firms      reported      about      20      claims 

since    1971,    evenly   distributed  by   year    except    for    1974   when    eight 
claims    were    reported. 


Damages  sought  for  new  claims  have  ranged  from  $100  to  $1.4 
million  dollars.  The  average  claim  was  $90,000  and  the  average 
settlement  was  about  $4,000.  Only  two  claims  are  currently 
pending    with    an    average    amount    sought   of  $85,000   per    claim. 

Water  and  Waste  Water  Equipment  Manufacturers  Association . — 
This  association  represents  manufacturers  of  equipment  and 
supplies  for  the  purification,  treatment  or  flow  measurement  of 
water.  Usable  responses  were  obtained  from  41  firms  out  of  a 
survey   of   246   member    firms. 

Thirty-seven  of  the  responding  firms  either  carry  some  form 
of  product  liability  coverage  or  are  self-insured.  Insurance 
costs  and  claims  were  reported  for  the  years  1970  through  1976. 
Insurance   costs   are    shown    in    Table    III-35. 


III-39 


Between  1970  and  197^  insurance  costs  increased  at  an  average 
rate  of  somewhat  less  than  20  percent  a  year.  However,  between 
197^  and  1975  the  average  rates  doubled  for  firms  in  the  $1  to  $5 
million  sales  category  and  increased  by  V6^  pgTxrgnt  for  firms 
with  sales  over  $5  milli'on.  '"^ 

The  smallest  firms  reported  considerably  higher  costs  for 
insurance  than  the~raFg'er  firms  during  the  two  years  fq^r_L which 
adequate  data  were  available.  However,  the  percentage  increases 
since  1973  were  not  as  large  for  the  smallest  firms   as   for   the 

others . 

Limits  of  liability  for  primary  coverage  appear  to  have 
changed  very  little  for  all  categories.  The  survey  indicated 
that  medium  and  larger  firms  are  assuming  much  higher  self- 
retention    levels    (3    to    6    times    as   high)    than    they   did    in    1971. 

Most  firms  carry  some  form  of  excess  coverage.  For  firms  in 
the  $1  to  $5  million  sales  category,  premiums  for  this  coverage 
have  not  changed  appreciably  over  the  last  five  years  despite  the 
fact  that  average  limits  of  liability  have  increased  from  $19  to 
$28  million.  Larger  firms  have  doubled  their  liability  limits 
and  appear  to  be  paying,  on  the  average,  about  four  times  more 
for  such  coverage.  Corresponding  data  for  firms  under  $1  million 
indicate  reduced  limits  of  liability  at  equal  or  higher  cost. 
These  estimates  are  based  on  a  rather  small  number  of  responding 
firms . 

The  responding  firms  reported  67  product  liability  claims 
during  the  six-year  period.  The  smallest  firms  accounted  for 
only  four  of  these  claims  while  the  firms  with  over  $5  million  in 
sales   had    over    60    percent   of   the    claims. 

The  total  number  of  claims  increased  sharply  from  1972  to 
1973  and  then  leveled  off.  There  does  not  appear  to  be  any 
definite  trend  in  the  amount  of  damages  sought  in  new  claims. 
However,  the  total  amount  of  damages  sought  in  pending  claims  has 
been  rising  steadily.  The  claims  experience  of  reporting  firms 
is    summarized    in    Table    III-36. 

During  the  six-year  period,  28  claims  or  suits  were  settled 
at    an    average   cost   of   about    $4,000. 


III-40 


Risk  and  Insurance  Management  Society  ♦  --This  survey  was 
conducted  in  the  fall  of  1976.  Responses  were  received  from 
about  370  firms,  which  represents  somewhat  less  than  15  percent 
of  the  total  membership.  Respondents  were  predominantly  large  in 
size;  the  median  firm  had  sales  of  $350  million  and  5,000 
employees.  About  5M  percent  of  the  firms  are  primarily  engaged 
in  manufacturing  with  the  remaining  46  percent  more  or  less 
equally  distributed  among  wholesale/distribution,  retailing  and 
serv  ices . 

Information  was  collected  on  estimated  costs  for  primary  and 
excess  insurance  coverage,  handling  costs,  deductibles  or  self- 
retention    levels,    and    limits   of   liability    per    occurrence. 

It  was  reported  that  premiums  for  primary  and  excess  coverage 
had  increased  about  200  percent  from  1971  to  1975.  It  appears 
that  much  of  this  increase  was  sustained  between  1971  and  1973, 
particularly    with    regard    to    excess   coverage. 

The  average  deductible  or  self-retention  level  has  also 
increased  by  about  200  percent  for  both  bodily  injury  and 
combined  single  limit  coverage.  The  1975  average  of  the  latter 
is  in  the  range  of  $40,000  per  firm.  The  average  amount  paid  out 
per  firm  in  settlements  during  1975  is  also  estimated  at  about 
$40,000. 

Limits  of  liability  increased  about  100  percent  during  the 
five-year  period  from  1971  to  1975.  The  net  effect  is  that 
insurance  coverage  for  each  dollar  of  expense,  including  premiums 
and  self-retention  costs,  is  now  about  half  of  what  it  was  in 
1971  . 

It  is  estimated  by  RIMS  that  two-thirds  of  the  claims  and 
suits  were  filed  against  firms  in  five  industry  groups. 
Inspection  of  preliminary  data  by  the  industry  contractor 
indicated  that  SIC  20,  Food  and  Kindred  Products  and  SIC  30, 
Rubber  and  Plastic  Products  accounted  for  60  percent  of  all 
claims    reported    in    1975. 

The  Society  also  indicated  that  the  number  of  claims  brought 
in  the  year  of  event  increased  36  percent  between  1971  and  1975 
and      that      the      dollar      value      of      claims      increased    six    percent. 


III-41 


Frequency  of  law  suits  did  not  increase  but  there  was  a  44 
percent  increase  in  reserves  set  aside  for  suits  over  the  five- 
year  period  . 

The  number  of  new  claims  brought  annually  was  reported  in 
preliminary  data  to  have  increased  from  about  55  claims  per  firm 
in  1971  to  181  claims  per  firm  in  1975.  However,  it  appears  that 
a  small  sample  of  companies  (7)  in  one  industry  category 
accounted  for  much  of  this  increase.  If  these  firms  are  removed 
from  the  sample,  the  average  number  of  claims  per  firm  in  1975 
would  be  95.  This  represents  a  72  percent  increase  since  1971 
and  a  15  percent  increase  since  1973. 

It  appears  that  the  vast  majority  of  claims  brought  are 
dropped  or  settled  in  the  year  in  which  they  are  filed.  However, 
preliminary  data  indicate  that  the  number  of  claims  pending  has 
tended  to  increase  about  in  proportion  to  the  increase  in  new 
claims  brought . 

RETORT,  Inc . — RETORT,  Inc.,  surveyed  a  number  of 
manufacturers,  distributors,  and  retailers  throughout  the  United 
States.  About  85  unprocessed  responses  were  provided  to  the  Task 
Fore  e . 

Questions  asked  in  the  survey  dealt  with  the  characteristics 
of  the  firm,  insurance  history,  claims  experience  and  insurance 
availability.  Unfortunately,  the  quality  of  the  responses  was 
mixed,  making  a  comprehensive  analysis  of  trend  information 
d  if f icul t . 

The  information  that  was  obtained  concerning  insurance  costs 
during  the  period  from  1973  to  1976  is  summarized  in  Table  III- 
37.  The  largest  increases  took  place  between  1975  and  1976,  with 
medium-sized  firms  having  the  biggest  increases.  The  310  percent 
increase  occurring  in  1976  for  small  firms,  following  an  increase 
of  75  percent  in  the  previous  year,  resulted  in  a  cumulative 
increase  during  the  1973-76  period  of  about  410  percent.  It 
should  be  noted  that  these  averages  are  significantly  influenced 
by  a  few  firms  that  reported  increases  of  500  percent  to  3,000 
percent.  For  example,  if  one  firm  reporting  a  2,000  percent 
increase   between   1975   and  1976  is  not  included  in  the  average, 


111-42 


the    percentage    increase    for      firms      in      the      under      $2.5      million 
category    for    1975-76    is    115    percent    rather    than    310    percent. 


Data  reported  on  claims,  damages  sought,  and  settlements 
showed  no  specific  patterns  other  than  that  the  amounts  paid  in 
settlements  tend  to  be  substantially  lower  than  damages  sought. 
It  also  appears  that  the  number  of  claims  and  suits  brought  in 
the  24-month  period  of  1974-75  was  about  35  percent  higher  than 
during    the    previous    24    months. 

National      Federation      of      Independent   Business . — The    National     •/ 

Federation    of    Independent    Business    (NFIB)    has   over    31,000      small, 

independent      manufacturer      members    spread    across    a    broad    spectrum 

of  manufacturing    industries.      The    NFIB    product      liability      survey 

was      conducted      in      October       1976.         A    sample   of   one   out    of    seven 

manufacturer   members    was    selected    for    inclusion      in      the      survey. 

Of      the      4,214    questionnaires   mailed,     1,296    firms    responded    for    a 

response    rate    of    31    percent.         The      results      of      the      survey      are 

6 
reported    in    detail    in    a    report    published    by    the    NFIB. 


.  rms 


About  58  percent  of  the  small  manufacturing  fi: 
responding  to  the  survey  reported  that  they  carry  product 
liability  insurance.  The  percentage  of  firms  carrying  product 
liability  insurance  increases  with  the  size  of  firms.  Among  the 
smallest  firms,  those  with  gross  receipts  of  less  than  $50,000, 
only  28  percent  reported  carrying  product  liability  insurance. 
This  percentage  increases  progressively,  to  78  percent  for  firms 
with  gross  receipts  of  $1  million  and  over. 


The 
follows 


major   findings   of   the   NFIB   survey  are  summarized  as 


Approximately  9  percent  of  the  firms  reported  that  they 
could  not  afford  to  carry  product  liability  insurance. 
Another  17  percent  reported  that  they  could  not  afford 
the  desired  limits  of  insurance.  However,  less  than  1 
percent  reported  that  they  could  not  obtain  insurance  at 
any  price.  About  3  percent  of  the  firms  reported  that 
they  have  discontinued  carrying  product  liability 
insurance  because  they  can  no  longer  afford  it. 


III-43 


Product  liability  insurance  rates  are  rising  rapidly. 
About  40  percent  of  the  firms  reporting  expect  their 
next  premium  increases  to  be  50  percent  or  more.  About 
half  of  those  firms  expect  the  increases  to  be  over  100 
percent . 

The  number  of  product  liability  claims  filed  against 
responding  firms  in  1976  is  estimated  to  be 
approximately  double  the  number  filed  in  1972.  The 
number  of  reported  claims  has  been  rising  steadily 
throughout  the  1972-76  period.  The  amount  of  damages 
paid  in  claims  has  also  been  rising  progressively.  As 
of  the  first  nine  months  of  1976,  the  amount  paid  out 
was  over  2.5  times  as  high  as  for  the  full  year  of  1972. 


A  number  of  firms  are  canceling  or  postponing  the 
introduction  of  new  products,  or  dropping  old  products, 
because  of  the  cost  of  product  liability  insurance,  an 
inability  to  obtain  product  liability  insurance,  or 
because  of  the  threat  of  product  liability  suits.  About 
one  in  eight  of  the  responding  firms  reported  that  a  new 
product  was  not  introduced  because  of  product  liability 
considerations.  About  one  firm  in  twenty  reported 
dropping  a  product  for  the  same  reason. 


WHAT  PRIOR  GOVERNMENT-COLLECTED  DATA  SHOW 

Introduction 

There  are  no  comprehensive  accident  and  injury  reporting 
systems  either  at  the  Federal  or  at  the  state  government  level. 
However,  a  number  of  special  purpose  reporting  systems  have  been 
developed  at  both  the  Federal  and  state  levels  in  conjunction 
with  the  administration  of  health  and  safety  regulations  and 
indemnity    programs    such   as    state    Worker    Compensation. 

The  industry  contractor's  work  effort  included  an  examination 
of  a  number  of  state  and  Federal  accident  and  injury  reporting 
systems.  Useful        data      were      acquired      from      several      systems 

concerning    product-related    accidents    in    both      the      workplace      and 
consumer    areas.       In    several    cases,    sufficient   data    were    available 


III-44 


to  examine  trends  in  accidents  and   injuries   over   a   period   of 
years . 

Data  on  workplace  injuries  were  obtained  from  Worker 
Compensation  systems  in  six  states.  The  Occupational  Safety  and 
Health  Administration  (OSHA)  of  the  U.  S.  Department  of  Labor  was 
able  to  furnish  this  information  under  a  supplementary  studies 
program  being  carried  out  by  the  U.  S.  Bureau  of  Labor 
Statistics.  Injury  data  based  on  employers'  first  reports  were 
obtained  for  197^  for  California,  Maryland,  Texas,  Washington, 
and  Wisconsin.  Trend  data  based  on  closed  compensation  cases 
were  obtained  from  New  York  for  the  period  from  1966  to  1972. 

Data  on  consumer  product  injuries  were  obtained  from  two 
Federal  agencies.  One  source  was  the  Consumer  Product  Safety 
Commission  (CPSC)  which  receives  reports  filed  by  selected 
hospital  emergency  rooms  with  its  National  Electronic  Injury 
Surveillance  System  (NEISS).  The  data  from  this  source  were 
available  for  the  period  from  1973  to  1975.  Data  on  general 
aviation  accidents  were  obtained  from  unpublished  tabulations  of 
aircraft  accident  reports  compiled  by  the  Federal  Aviation 
Administration  (FAA)  from  196^  to  1975. 

Workplace  Injuries 

Data  on  workplace  injuries  were  derived  from  employers'  first 
reports  of  injuries  filed  with  state  Worker  Compensation  boards 
and  commissions  and  from  closed  compensation  cases.  The 
employers'  first  reports  are  the  immediate  reports  of  accidents 
and  injuries  filed  at  the  time  of  occurrence,  while  closed 
compensation  cases  are  the  claims  that  have  been  settled  by 
insurance  carriers  or  adjudicated  by  state  accident  boards  or 
commissions.  The  distinction  is  significant  in  that  the 
preponderance  of  industrial  injuries  may  not  result  in  time  lost 
from  work  or  in  claims  being  filed.  However,  both  sources 
provide  information  on  workplace  injuries,  the  product  or  agent 
involved,  the  nature  of  the  injury,  and  related  information. 

First  report  data  for  197^  from  the  States  of  California, 
Maryland,  Texas,  Washington,  and  Wisconsin  were  analyzed  to 
determine  the  incidence  of  accidents  related  to  the  products 
selected  for  study   by   the   Task   Force.    The   results   of   the 


III-45 


analysis  indicate  that  these  products  accounted  for  14.3  percent 
of  the  accidents  in  California,  9.9  percent  in  Wisconsin,  9.5 
percent  in  Washington,  9.4  percent  in  Maryland,  and  3.7  percent 
in  Texas.  Among  the  selected  products,  the  two  most  frequently 
associated  with  workplace  accidents,  by  a  very  substantial 
margin,    were  motor    vehicles    and    cutting    and    forming    tools. 

Closed  compensation  cases  from  the  State  of  New  York  were 
analyzed  for  the  period  from  1966  to  1972.  About  one-fifth  of 
the  cases  during  this  period  involved  the  products  designated  for 
study.  There  was  no  significant  change  in  that  proportion  over 
the  period.  Motor  vehicles  and  industrial  machinery  were  again 
the  products  most  frequently  associated  with  accidents  among  the 
product  groups  selected  for  study.  However,  the  percentage  for 
industrial  machinery  decreased  somewhat  from  4.96  percent  in 
1966-70  to  3.35  percent  in  1972.  The  percentage  for  motor 
vehicles  remained  unchanged  at  about  9.2  percent.  The  total 
number  of  industrial  accidents  reported  in  the  New  York  closed 
claims  data  increased  by  about  2.5  percent  between  1966-70  and 
1972. 

The  use  of  closed  compensation  claims  data  enabled  the 
contractor  to  derive  estimates  of  the  approximate  severity  of  the 
injuries,  which  is  related  to  the  number  of  weeks  of  benefits 
paid  and  the  amount  of  benefits  paid.  The  most  severe  injuries 
were  found  to  be  associated  with  aircraft  accidents,  followed  by 
chemicals,  ladders,  and  automobiles.  However,  there  was  no 
indication  that  there  was  any  change  in  the  severity  or  in  the 
frequency  of  accidents  associated  with  these  products  during  the 
1966-72  period.  The  same  patterns  were  found  for  all  product- 
related    accidents    reported    in    the    New   York   closed    claims   data. 

These  limited  available  data  on  workplace  accidents  confirm 
that  the  products  selected  for  study  by  the  Task  Force  were 
frequently  involved  in  workplace  injuries.  Differences  in  the 
percentages  of  total  industrial  injuries  associated  with  these 
products  in  the  various  states  studied  can  probably  be  attributed 
to  the  differences  in  industrial  composition  among  the  states, 
and    consequently,    the    variation    in    product   exposure. 

Data  for  analyzing  the  trends  in  product-related  accidents 
were    unfortunately    available   only    for    New   York      State.         However, 


III-46 


the  analysis  of  over  100,000  closed  claims  annually  for  the 
seven-year  period  from  1966  to  1972  indicates  that  the  frequency 
and  severity  of  workplace  injuries  related  to  these  products  have 
remained  relatively  constant.  The  same  also  appears  to  be  true 
for    the    individual    product   groups    that    were    analyzed. 

The  results  of  the  analyses  of  workplace  injuries  as  reported 
to  the  state  Worker  Compensation  systems  are  presented  in  detail 
in    Chapter    III    of   the    Industry    Study. 

Consumer    Product    Injuries 

Data  from  the  Consumer  Product  Safety  Commission  were 
analyzed  to  develop  a  profile  of  consumer  product-related 
injuries  and  to  determine  whether  there  were  any  trends  that  may 
be  relevant  to  the  product  liability  problem.  Data  were 
available  from  the  National  Electronic  Injury  Surveillance  System 
(NEISS)  for  the  years  of  1973,  1974,  and  1975.  The  data  were 
reported  by  119  selected  hospital  emergency  rooms.  The  agent  of 
injury  was  reported,  as  well  as  the  severity  of  the  injury,  on  a 
scale   of   0   to    8. 

Injuries  were  reported  for  about  950  different  product  codes 
in  1974  and  1975.  This  was  an  increase  from  725  products  in  1973 
when    the    program    was    started. 

A  severity  index  has  been  devised  for  NEISS  which  assigns 
progressively  higher,  judgmental  weights  to  nine  different 
categories  of  injuries,  ranging  in  value  from  0  to  10.  By 
multiplying  the  number  of  injuries  reported  times  the  average 
severity  per  injury,  another  measure  of  product  risk  is  derived 
called    the    Frequency/Severity    Index    (FSI). 

A  small  number  of  products  caused  a  majority  of  the  injuries 
reported  in  each  of  the  three  years.  About  25  consumer  products 
accounted  for  approximately  three-fifths  of  the  injuries  reported 
by  NEISS.  The  number  of  injuries  reported  for  all  products 
totaled  315,371  in  1973,  305,508  in  1974,  and  386,739  in  1975. 
In  terms  of  frequency,  stairs  and  bicycles  were  the  most 
hazardous  products,  accounting  for  6.9  percent  and  5.6  percent  of 
the    injuries    reported    in    1975.    Based      on      the      Frequency/Severity 


III-47 


Index,      these      two    products    also    ranked    number    one    and    two    as    the 
most    hazardous    products. 

Among  the  consumer  products  selected  for  this  study,  motor 
vehicles,  drugs,  and  lawnmowers  ranked  among  the  top  15  most 
hazardous    products   based    on    the    FSI. 

Aviation  accidents  are  not  reported  to  the  CPSC  information 
system  since  they  come  under  the  jurisdiction  of  the  Federal 
Aviation  Administration.  The  FAA  collects  and  analyzes  data 
annually  on  the  incidence,  causes,  and  characteristics  of  general 
aviation    accidents. 

A  time  series  of  general  aviation  accidents  was  prepared  by 
the  industry  contractor  from  FAA  data  for  the  period  from  1965  to 
1976  for  the  purpose  of  analyzing  the  trends  in  accidents. 
General  aviation  accidents  were  divided  into  three  broad 
categories:  product-related,  human-related,  and  other.  Injuries 
were  classified  according  to  severity  as  fatal,  serious,  minor, 
and    none/unknown. 

Analysis  of  the  FAA  data  revealed  that  while  the  total  number 
of  accidents  almost  doubled  between  1965  and  1974,  the  number  of 
accidents  per  thousand  hours  of  flying  time  remained  essentially 
constant  throughout  this  time  period.  Product-related  accidents 
accounted  for  less  than  half  of  all  minor  injuries  reported, 
about  one-fourth  of  all  serious  injuries,  and  less  than  one-third 
of  all  fatalities.  It  was  also  found  that  the  proportion  of 
product-related  injuries  remained  constant  during  the  period  from 
1965    to    1974. 

The  results  of  the  analyses  of  consumer  product-related 
injuries  are  discussed  in  detail  in  Chapter  III  of  the  Industry 
Study. 


1 1 1 -4  8 


NOTES    TO   CHAPTER    III 

See  Interagency  Task  Force  on  Product  Liability,  Product 
Liability:  Industry  Study ,  Volume  II,  Appendix  B  (Washington: 
U.S.    Department    of    Commerce,    May    1977). 

2 
In      this      chapter      the      term    "umbrella"    insurance    is    used    to 

represent    all    forms   of   excess    liability    insurance   coverage. 

Interagency  Task  Force  on  Product  Liability,  Product 
Liabil ity :         Industry      Study ,         Volume        I         (Washington:  U.S. 

Department   of    Commerce,    May    1977),    p.    IV-39. 

4 
All      of      the      data      in      this      section      are      from      the    report 

published      by      the      Machinery      and      Allied         Products         Institute 

presenting      the      results      of      their      survey--Machinery    and    Allied 

Products      Institute,         Products        Liabil ity:  A        MAPI        Survey 

(Washington:         Machinery      and      Allied      Products    Institute,    August 

1976)  . 

5 
This   average   does   not  include  one  firm  reporting  a  20,000 

percent  increase. 

National  Federation  of  Independent  Business,  NFIB  Survey 
Report  on  Product  Liability  (Washington:  National  Federation  of 
Independent  Business,  January  1977). 


111-^9 


Table  III- 1 . --Number  of  Firms  in  the  Sample ,  Number  of  Responses  and 
Response  Rates ,  by  Product  and  Sales  Categories 


Product  Category 
Industrial  products 


Less  than  $2.5  million 

Number      Number     Percent 

Contacted    Responses   Response 


$2.5  to  $100  million 

Number      Number     Percent 

Contacted    Responses   Response 


Industrial  machinery 
Metal  castings 
Grinding  wheels 
Industrial  chemicals 


18 

14 

78 

18 

11 

61 

16 

8 

50 

17 

12 

71 

20 

11 

55 

20 

13 

65 

18 

15 

83 

21 

18 

86 

Consumer  products 


Power  mowers 
Automotive  components 
Pharmaceutical s 
Medical  devices 
Aircraft  components 

All  product  cate- 
gories 


18 

15 

83 

20 

9 

15 

22 

12 

55 

20 

13 

65 

18 

9 

50 

167 


103 


62 


18 

14 

78 

21 

14 

67 

19 

12 

63 

19 

13 

68 

18 

9 

50 

174 


1  19 


68 


Product  Category 

Industrial  products 

Industrial  machinery 
Metal  castings 
Grinding  wheels 
Industrial  chemicals 


$100  million  and  over 

Number      Number     Percent 

Contacted    Responses   Response 


20 

18 

90 

18 

14 

78 

8 

3 

38 

17 

14 

82 

All  Firms 
Number      Number     Percent 
Contacted    Responses   Response 


58 

43 

74 

56 

38 

68 

42 

26 

62 

55 

44 

80 

Consumer  products 


Power  mowers 

19 

8 

42 

Automotive  components 

19 

15 

79 

Pharmaceuticals 

19 

16 

84 

Medical  devices 

17 

15 

88 

Aircraft  components 

21 

12 

57 

All  product  cate- 

gories 

158 

115 

73 

55 

37 

67 

60 

38 

63 

60 

40 

67 

56 

41 

73 

57 

30 

53 

499 


337 


68 


Source:      Product    Liability    Industry   Telephone    Survey,    Gordon    Associates    Inc.,    December 


1976. 


III-50 


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Tnble  I II-1  1  .  --Avernp.e  Uumhcr  of  Pending  Claims, 
by  Product  CatPK'^ry--1971-76 


Product  Category 


1971 
Number  of 
Claims/Firm 


Number 


1 


Year 

1972 
Number  of 


1 


1973 
Number  of 


Claims/Firm    Numter   Claims/Firm   Number 


Industrial  products 


Industrial  machinery 
Metal  castings 
Grinding  wheels 
Industrial  chemicals 


1.9 

36 

2.2 

36 

6.00 

35 

1.9 

35 

2.9 

35 

3.9 

35 

3.6 

25 

3.9 

25 

'i.l, 

25 

O.lJ 

32 

1.7 

3« 

3.2 

36 

Consumer  products 


Power  mowers 
Automotive  components 
Pharmaceutical s 
Medical  devices 
Aircraft  components 


6.2 

33 

9.1 

32 

10.2 

33 

1.8 

26 

3.3 

27 

4.0 

27 

10.  1 

32 

9.1 

32 

10.  1 

32 

1.9 

33 

3.7 

35 

6.1 

36 

3.5 

21 

6.3 

23 

7.7 

23 

All  product  cate- 
gor  ies 


3.5 


273 


li.S 


280 


6.2 


282 


Product  Category 
Industrial  products 


197'4 
Number  of 
Claims/Firm 


Number 


Year 
1975 
Number  of 
Claims/Firm 


Nurber 


1976 
Number  of 
Claims/Firm   Number 


1 


Industrial  machinery 
Metal  castings 
Grinding  wheels 
Industrial  chemicals 


7.  1 

36 

10.  1 

38 

18.1 

39 

4.9 

35 

6.5 

35 

8.6 

35 

6.6 

25 

7.3 

25 

11.4 

25 

4.6 

37 

10.2 

38 

8.5 

36 

Consumer  products 


Power  mowers 

16.9 

34 

19.3 

S"* 

48.  1 

35 

Automotive  components 

32.2 

29 

39.0 

29 

36.9 

28 

Pharmsoeut  ical s 

11.3 

32 

12.3 

32 

13.7 

33 

Medical  devices 

12.5 

38 

12.7 

39 

12.9 

39 

Aircraft  components 

8.3 

23 

11.0 

23 

11.3 

24 

All  product  cate- 

gor  ies 

11.4 

289 

14.0 

293 

18.9 

294 

1 


Number  indicates  the  number  of  firms  responding. 


Source:    Product   Liability  Industry  Telephone  Survey,  Gordon  Associates  Inc.,  December 
1976. 


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Table  I II-1 7  . --Summary  of  Trade 
Partlc  Ipat ing  In  th< 


Trade  Associations 

Cast  Metals  Federation 

Industrial  Heating  Equip. 
Assoc  . 

American  Die  Casting  Inst. 

Water  i  Waste  Water  Equip. 
Mfrs.  Assoc. 

Woodworking  Machinery  Mfrs. 
of  America 

Woodworking  Machinery  Distrib. 
Assoc . 

Railway  Progress  Institute 

Society  of  the  Plastics  Ind. 

Machinery  &  Allied  Products 
Institute 

Automotive  Parts  &  Accesso- 
ries Assoc. 

Recreation  Vehicle  Industry 
Assoc  . 

Nat'l.  Machine  Tool  Builders 
Assoc  . 

American  Textile  Machinery 
Assoc  . 

American  Textile  Mfrs.  Inst. 

Calif.  Grain  &  Feed  Assoc. 

Health  Industries  Mfrs.  Assoc. 
General  Aviation  Mfrs.  Assoc. 
Grinding  Wheel  Institute 


Assoc  i.it  ions  and  Cthcr  Organ  l^atlons 
Product  L^a^^ ij^i_t\_  Study 

Number  cf 
Completed 
Survey 

Responses      Information  Provided 

250      Individual  records 

53      Individual  records 
52      Individual  records 

11      Individual  records 

46      Summary  statistics  i  text 

32      Data  array 
13      Individual  records 
366      Statistical  tables 

210      Summary  statistics  i  text 
110      Summary  statistics  i  text 

67      Summary  statistics,  tables 

60      Summary  statistics 

16      Summary  statistics 
IfS      !^ata  array 

37      Summary  statistics,  text, 
quotations 

48       Summary  text 

35      Summary  text 

Summary  text 


Other  Participating  Or?an  i  za tions 

RETORT,  Inc.  87 

Risk  and  Insurance  Management 

Society  371 


National  Federation  of 
Independent  Business 


1  ,296 


Individual    records 


;.ata    array,    r.agneti:;    tape 
r ecc  rd  s 


"ummnry    .'Jtati  sties    'i    text 


Source:  Respective  Tr.Tdo  A.isoc  iat  ions  and  Other  OrF.an  I  za  t  lons-- 
data  cornpllfd  by  Gord</ri  Asooc  la  to  i ,  Inc.,  an':  U.  S.  De  par  tmi.-T  t  of 
Commerce,     December    19Y6. 


III-66 


T.iblf;    r  r  I  -  1_8  . --;i_tj/r-    Ch.ir.K:' '-r  i  st  i-^.'i    o.'    yor.por.'lnnta    to    Utt 
Tri'd'     As  .'•.or.  ;  .it  i  or    ^',i;i  i^:/:: 


Prof[iJCt    CstoKory 
A  .  toriot :  ve    Conponen  t.s  : 


L.'.rp.e  llij'f^    'Vdlun  Lou   Mo'liun 

Over    :inO    rr.ii.  ($':>0-100    mi:.  'JS-'jO    mil. 

^nnu.j)    .",Tle.-)  .^nnu-il    .Snle?.)  Annusl    .'5alec) 


r^mnll 
(Uiu;nr    $5    nil. 
Annual    Sales) 


Automctive    Parts    and 
Accc:i.-,or  i.-?3    As.^oc. 


Uol    Available 


Recreation    Vehicle 
I  n  d  .  3 1  r  y    A  s ,';  o  c  . 

Ai rcraf ''-    Components: 

Ceneril    Aviation    Mfrs. 
Assoc . 

Industr  ial    Ha o_h j_ner_y  : 

Woodworking    Machinery 
Distributors    Assoc. 


''.C.    Available 


6(;7%) 


21  (60J) 


8(23?) 


i,'c  t    Available 


Woodworking    Machinery 
Mfrs.    of    America 

Ameri:an  Textile 
Macninery  Assoc. 


U2l) 


i'J%) 


12(27%) 


12(26%) 


31(70%) 


31  (67%) 


Industrial  Heating 
Equipment  Assoc. 

Raili.^y  Progress  Inst. 

National  Machine  Tool 
Builders  Assoc. 


1(2%) 

6(146%) 

8(31%) 


2(4%) 

14(31%) 


19(36%) 
3(23%) 


23(38?) 


31(58%) 


29(18%) 


Vetal  Castings: 


American  Die  Casting 
Institute 
Merbers 
Af f il iates 
Survey-Overal  1 

Cast  Metals  Federation 

:-r  ind  ir.  J  Wheels: 

Grinding  Wheels  Inst. 

Indust.'- i.Tl  Chemicals: 


3(-7%) 
3  (6  : ) 

9(3%) 


1  (2%) 

16(36%) 

-- 

1(13%) 

1 :?%) 

17(33%) 

6(2%) 

106(43%) 

Not  Available 


27(61%) 
4(50%) 
31(6C%) 

128(51%) 


Soci-.^ty    of   the    Plastics 
Tn.iustry 

Processors  5(-%) 

Materials    .Suppliers  16(30%) 
Ot);or     (tool,    molding 

m.ichinos)                                T  '  -  ^'-■'_ 
Su;•  v  ey-Ov  eral  1  ?}.{:%) 


U  1% ) 
?(9%) 

___:(_?  %_2 

1  0  r^  %  ) 


■36(287) 
11  (2  1t) 

-  "^  '•2?-  'J 
.V(^5%i' 


1 35(68%) 
2  1(40%) 

__8  3J  72%1_ 
2y9(65%) 


III-67 


Product  Category 

Med  ical  Dev  ices: 

Health  Industry  Mfrs. 
Assoc . 

Other: 

California  Grain  and 
Feed  Assoc. 

Water  and  Waste  Water 
Equipment  Mfrs.  Assoc. 

American  Textile  Mfrs. 
Institute 

Diversi  fled  Surveys : 

Machinery  and  Allied 
Products  Institute 

Risk  and  Insurance 
Management  Society 

RETORT,  Inc. 

National  Federation  of 
Independent  Business 


Large 
(Over  $100  rail 
Annual  Sales) 


High  Medium 
($50-100  mil . 
Annual  Sal es) 


Low  Medium 

($5-50  mil . 

Annual  Sales) 


Small 
(Lnder  $5  mil. 
Annual  Sales) 


Not  available  but  industry  dominated  numerically  by  small  ^usiness 


29(20%) 


103(H9X) 


18(12%) 


29(14%) 


12(60%) 


16(39%) 


87(59%) 


53(25%) 


263(82%)  27(8%)  32(10%) 

Not    available 

Not   available   but    all    presumed    to   be    small. 


8;ic%) 


25(61%) 


TJig?) 


25:12%)^ 


Note:       Percentage    totals   may    not    add    due    to    rounding 

^Represents    firms    with    sales   of   $10    to    $50    million. 

■^Represents    firms    with    sales    under    $10    million. 

SOURCE:         Respective      Tride      Associations      and      other      Organ  1 zations--date    compiled    by 
Gordon    Associates,    Inc.,    and    U.    S.     Department   of    Commerce,    Decomter    1976. 


III-67a 


TaM_p    I_I_I_-_I_9.— Rpjirion-^  ^l.v^f^.    for    Hot    Crirj y^lji c    Product    LlablUt;, 
Insurnnoo    in    Tr  .'ido   "A^jtoo  i  a  1 1  on    Surveys 


Trade    Association    and 

Prodomin.-int    Clze    of 

Firms    Reporting 

Smal 1 : 

Health  Industry 

Manufacturers  Assoc. 

Water  ^  Waste-Water 
Equip.  Mfrs. 

American  Die-Casting 
Inst  i tute 

Cast  Metals  Federation 

Society  of  the 

Plast  ics  Industry 

Woodworking  Machinery 
Manufacturers 

American  Textile 
Machinery  Assoc. 

Industrial  Heating 
Equip.  Assoc. 


Sol  f- 


Roasonr.    For    Not    Ca r  r  y  1  n p.    Product    Lt  abil  ity 

\itr.~of  ' 
Too  Don't      Can't  Mot         Firms    not 

Canceled      Given         Insured 


Insured        Expensive      Need 

3^  3 

3  1  1 


1 1 
9 


16 

12 


Get 


7^ 


10 

7 

10 

36 
11 

3 
2 


I   of 

Assoc latlon 

Sample 


21 


17 

19 

18 
11 

7 

H 


Med  ium-Small : 


Ar.erican  Textile 
Mfrs.  Institute 


California  Grain  & 
Feed  Assoc . 


21 


27 
3 


18 


Large: 

Machinery  &  Allied 
Products  Institute 

Railvjay  Progress 
Institute 

Risk  &  Insurance 
Mngmt.  Society 

Unknown: 

Automotive    Parts    4 
Accessories    Assoc. 

Recreation    Vehicle 
Industry    Assoc. 

TOTALS 


3 
3>i 


32 


56 


17 


16 


9 
3 

163 


Includes    1    firms    with    very   high   deductible    level s--exceed ing    loss    expectation. 


Figure    from    text;    not    statistically   supported. 

Mentioned    but    no    figures    provided. 

New    firms   having    trouble    finding    coverage. 

Source:         Respective      Trade      Associations--data      compiled      by      Gordon    Associates    Inc.,    and    U.S. 
Department    of    Commerce,    December    1976. 


III-68 


Table  III-20  . — Product  Liabil ity  Insurance- -Aver age  Annual 
Cost  Per  Thousand  Dollars  of  Sales-- (ATMA ) 


Year 


Average  Cost 


No .  of  Firms 


Sales  under  $2  million 


1976 
1975 
1974 


$1 1 .62 

9.84 

.83 


12 

13 
12 


Sales  from  $2  to  $10  million 


1976 
1975 
1974 


$5.79 
.60 
.52 


1  1 
9 
9 


Sales  over  $10  million 


1976 
1975 
1974 


$  1.11 
.78 
.58 


8 
10 
10 


All  firms 


1976 
1975 
1974 


$6.84 

4.41 

.66 


31 
32 
31 


III-69 


Table  III-21 , — Claims  Experience  of  Reporting  Firms-- (ATM A ; 


New   claims    filed 


Year 

New  Claims 

Damages  Sought 

No. 

of  Firms 

1976 

14 

$3,443,236 

6 

1975 

31 

8,776, 120 

10 

1974 

22 

3,532,532 

6 

Claims  settled  out  of  court 


Year 


No.  of  Claims 


Amount  Paid 


1976 
1975 
1974 


$   4,925 

275,272 

32,440 


Claims  pending  at  end  of  year 


Year 


Number 


Damages  Sought 


No.    of   Firms 


1976 
1975 
1974 


18 
16 
12 


$5,682,347 
6,327,000 
2,470,060 


III-70 


Table  III-22 , — Product  Liabil ity  Insurance- -Aver age  Annual  Cost 
Per  Thousand  Dollars  of  Sales .-- (IHEA ) 


Year 


Average  Cost 


No.  of  Firms 


Sales  under  $5  million 


1975 
1974 
1973 
1972 
1971 


$1  .88 
1  .  14 

.86 
*.69 

.66 


19 

14 

12 

7 

7 


Sales  of  $5  to  $10  million 


1975 
1974 

1973 
1972 
1971 


$  .79 
.64 
.62 
.64 
.67 


3 
2 
2 
2 
2 


Sales  over  $10  million 


1975 
1974 

1973 
1972 
1971 


$1.43 

1  .00 

1  .00 

.86 

1  .21 


7 
6 
5 
4 
3 


All    firms 


1975 
1974 

1973 
1972 
1971 


$1  .95 
1.27 
1  .06 

*1  .01 
.95 


29 
22 
19 
13 
12 


^Excludes  one  firm  that  reported  $8.72  per  thousand. 


III-71 


Table    III-23 . — Claims   Experience    of   Reporting    Firms — (IHEA) 


New   claims    filed 


Year 

New 

Claims 

Damages  Sought 

No  .  of  Firms 

1975 

33 

$53,637,000 

14 

1974 

17 

6,857,000 

10 

1973 

15 

1 ,826,000 

9 

1972 

8 

1 ,417,000 

7 

1971 

15 

586,000 

8 

Claims    settled    out    of   court 


Year 


No.    of   Claims 


Amount   Paid 


1975 
1974 

1973 
1972 
1971 


$391 ,000 
67,000 
91 ,000 
25,000 
78,800 


Court  judgments 


Year 

Sui 

ts 

Won 

Sui 

ts 

Lost 

J_ 

udgments  Paid 

1975 

0 

1 

$65,000 

1974 

0 

1 

10, 000 

1973 

1 

0 

-0- 

1972 

0 

0 

-0- 

1971 

0 

0 

-0- 

Claims/suits  pending  at  end  of  year 


Year 

Number 

Damages  Sought 

No  .  of  Firms 

1975 

57 

$79,600,200 

18 

1974 

32 

9,582,500 

13 

1973 

22 

4,935,500 

10 

1972 

1  1 

4,733,000 

7 

1971 

5 

3,588,000 

4 

III-72 


Table  III-24 . --Claims  Experience  Pur  ing  the  Period 
From  1970  to  1975.  — (MAPI) 


Item 


Number 


Amount 


No  .  of  Firms 


(1)   Total  claims  presented   16,785   $366,905,041 


(2)  Claims  paid  without 
court  action 

(3)  Claims  rejected 

(4)  Claims  pending 


4,396 


(7)  Suits  settled  out  of 
court 

(8)  Judgments  for 
defendant 

(9)  Suits  pending 


8,675,282 


2,858    35,414,537 


1 


3,272    176,663,709 


(5)  Suits  filed  on  claims   11,768    828,465,205' 

(6)  Judgments  for  claimants     212     22,059,978 


1,218   115,794,838 

^^^    375,124,013- 
3,203    113,841,101 


176 

175 
138 
159 
156 
152 

156 

133 
161 


1 
Many   respondents   reported   the   number   of  claims  rejected 

without  indicating  amounts;  therefore  this  amount  represents  only 

892  of  the  rejected  claims. 

2 
About   34   percent   of   this   amount   is   attributed   to  one 

company . 

3 
Many   respondents   reported   the   number   of   judgments   won 

without  reporting  the  amounts   involved;   therefore   this   amount 

represents  only  197  judgments. 


III-73 


Table  III-25 . — Claims  Experience  of  Reporting  Firms  .  --(RPI ) 


New  claims  filed 

Year     New  Claims 


Damages  Sought 


Claims/suits  pending  at  end  of  year 

Year      Number      Damages  Sought 


No.  of  Firms 


1975 

20 

$96,000,000 

5 

1974 

12 

88,000,000 

5 

1973 

6 

28,000,000 

5 

1972 

9 

6,000,000 

5 

1971 

3 

5,000,000 

5 

No  .  of  Firms 


1975 

21 

$150,000,000 

5 

1974 

18 

59,000,000 

5 

1973 

13 

35,000,000 

5 

1972 

1 1 

1 1 ,000,000 

5 

1971 

5 

6,000,000 

5 

Table  III-26. — Insurance  Cost  Per  Firm — (WMMA) 


Year 


Average  Cost 


No  .  of  Firms 


Primary  product  liability  insurance 


1976 
1975 
1974 

1973 
1972 
1971 

Excess  coverage 

1976 
1975 
1974 

1973 
1972 

1971 


$30,089 
12,607 
5,525 
4,502 
5,338 
3,084 


$  7,474 

7,434 

3,078 

2,665 

698 

815 


26 
29 
25 
20 
20 
17 


12 

15 

11 

7 

6 

5 


III-74 


Table  III-27 . --Claims  Experience  of  Reporting  Firms- (WMMA) 
New  claims  filed 


Year 

New  Claims 

Damages  Sought 

No.  of  Firms 

*1976 

37 

$  9,360,000 

16 

1975 

54 

21,863,046 

17 

1974 

48 

14,273,000 

15 

1973 

20 

6,758,700 

9 

1972 

32 

6,791,750 

14 

1971 

19 

2,919,107 

1  1 

Estimated  suits  filed  (dollar  amount  represents  amount  reserved) 


Year 

*1976 
1975 
1974 

1973 
1972 
1971 


N 

umber 

9 

15 

20 

6 

9 

4 

Amount 

$1 ,534,000 

1 , 193,000 

2,715,050 

183,500 

881 ,667 

1,395,757 


Claims  pending  at  end  of  year 


Year 

*1976 
1975 
1974 
1973 
1972 
1971 


N 

umber 

27 

30 

17 

10 

1  1 

3 

Damages  Sought 

$  5,893,500 
10,438,000 
6,516,750 
3,235,250 
3,086,750 
1  ,  195,000 


*Data  for  1976  are  incomplete. 


III-75 


Table  III-28. — Primary  Product  Liability  Insurance--Average  and 


Median  Annual 

Costs 

Per  Thousand 

Dollars  of 

Sales--(SPI) 

Year 

Averaj 

le    Cost 

Median  Cost 

No.  of  Firms 

All  respondents 

1976 

$2 

.20 

$  .99 

168 

1975 

1 

.35 

.50 

163 

1974 

.79 

.41 

133 

1973 

.62 

.29 

104 

1972 

.70 

.38 

88 

1971 

.79 

.39 

59 

1970 

.68 

.30 

47 

Processors 

1976 

.65 

100 

1975 

.38 

98 

1974 

.29 

78 

1973 

.27 

63 

1972 

.30 

48 

1971 

.29 

33 

1970 

.30 

28 

Material  suppliers 

1976 

1.13 

14 

1975 

.49 

13 

1974 

.39 

9 

1973 

.29 

7 

1972 

.39 

9 

1971 

.39 

7 

1970 

.29 

5 

Mold  and  tool  mak 

ers 

1976 

.98 

14 

1975 

.39 

11 

1974 

.45 

9 

1973 

.29 

5 

1972 

.29 

5 

1971 

.29 

3 

1970 

.29 

3 

Machinery  manufac 

turer s 

1976 

2.50 

40 

1975 

1  .22 

41 

1974 

.98 

37 

1973 

.79 

29 

1972 

.90 

26 

1971 

.95 

16 

1970 

.49 

11 

III-76 


Table  TH.-^!. — Claims  Experience  For  All  Respondents-- (?PI  ) 
New  claims  filed 


Year 

New  Claims 

•1976 

228 

1975 

357 

1974 

310 

1973 

226 

1972 

187 

1971 

85 

1970 

81 

ms    Damages  Sought 

$98. 1  million 

40.7  million 

47.4  million 

40.2  million 

17.1  million 

17.4  mil  1  ion 

6.  1  mill  ion 


Claims  settled  out  of  court 


Year 


No  .  of  CI  aims 


Werage  Anoun: 
Per  CI  ai'n* 

506, 052 
122, 6G6 
163, 9~2 
196,889 

98,8^6 
246,603 

95,297 


Amounts  Paid 


••1976 

52 

$ 

451 , 949 

1975 

67 

,  4',6,  441 

1974 

37 

3^4,706 

1973 

32 

310,067 

1972 

12 

153,955 

1971 

26 

3C3,70O 

1970 

31 

233,534 

Court  judgments 

Year 

Suits  V.on 

Suits  Lost 

Juc 

gments  Paid 

••1976 

4 

3 

$  66,000 

1975 

7 

5 

229,500 

1974 

n 

9 

492,000 

1973 

4 

5 

29,000 

1972 

8 

0 

-0- 

1971 

6 

2 

97,757 

1970 

7 

7 

60,000 

Claims/suits  pending  at  end  of  year 
Year  Number 


1976" 

1975 

1974 

1973 

1972 

1971 

1970 


254 
231 
181 
95 
79 
60 
52 


Damages  Sought 

$150. 2  million 

77.1  millicri 

73.2  millicn 
52  .  4  Tiill  icT 
37.5  millicn 
19.4  mil lien 
14.4  million 


•  Companies  did  r:ot  report  amount  of  damage: 
claims  reported.   These  averages  are  based 
claims  for  which  amounts  were  reported. 

••Data  for  1976  are  incomplete. 


iought    for  all 
only  on      th:)S° 


III-77 


Table  III-30  » --Primary  Product  Liability  Insurance-- Aver age  Annual 
Cost  Per  Thousand  Dollars  of  Sales. — (CMF) 


Year 


Average  Cost 


No  .  of  Firms 


Sales  under  $5  million 


1976 
1975 
1974 

1973 
1972 
1971 


$1.25 
.81 
.55 
.55 
.58 
.47 


60 
57 
36 
25 
17 
13 


Sales  of  $5  to  $10  million 


1976 
1975 
1974 
1973 
1972 
1971 


$1 


31 
71 
56 
34 
40 
43 


27 
27 
21 
16 
12 
10 


Sales  over  $10  million 


1976 
1975 
1974 
1973 
1972 
1971 


$1 


04 
40 
32 
32 
40 
43 


34 
31 
30 
28 
26 
24 


All  firms 


1976 
1975 
1974 
1973 
1972 
1971 


$1 


20 
68 
47 
41 
46 
44 


121 
115 
87 
69 
55 
47 


III-78 


Table  III-3 1  . — Claims  Experience  of  Reporting  Firms-- ( CMF) 


New  claims  filed 


Year 

1975 
1974 
1973 
1972 
1971 


N 

ew 

Claims 

26 

14 

13 

13 

5 

Damages  Sought 

$  9,676,000 

4,050,000 

1 ,270,000 

825,000 

1 ,300,000 


Claims  settled  out  of  court,  1971-75 


Si  ze  of  Firm 
Under  $5  million 
$5  to  $10  million 
Over  $10  million 
All  Firms 


No. 

of  CI 

aims 

Amount  Paid 

4 

$  18,300 

6 

66,000 

13 

371 ,000 

23 

455,300 

Court  judgments,  1971-75 


Total  court  suits 
Won  by  defendant 
Lost  by  defendant 
Judgments  Paid 


5 
3 
2 

$451 ,000 


Claims/suits  pending  at  end  of  year 


Year 


Number 


Damages  Sought 


1975 
1974 

1973 
1972 

1971 


20 
8 
6 
3 
2 


$9,650,000 
3,450,000 
2,500,000 
1 ,705,000 
1 ,500,000 


III-79 


Table  III-32 . --Average  Insurance  Costs  Per  Firm--(ADCI) 


Primary  product  liability  insurance 


Year 

1975 
1974 

1973 
1972 
1971 


Average  Cost 

$21  ,."(5  7 
17,762 
12,400 
12,671 
1 1 , 132 


No.  of  Firms 


26 

21 

19 

15 

14 

Umbrella  coverage 


Year 

1975 
1974 
1973 
1972 
1971 


Average  Cost 

$  4,033 
3,642 
3,509 
3,613 
2,580 


No.    of  Firms 


29 

24 

21 

15 

13 

III-80 


Table  III-33 . -Product  Liabil ity  Insurance-Average  Annual  Cost 
Per  Thousand  Dollars  of  Sales-(RVIA) 


Year 


Average  Cost 


No  .  of  Firms* 


Manufacturers 


1976 
1975 
1974 
1973 
1972 
1971 


$3.40 
2.67 
1.78 
1.69 
1.88 
1.89 


22 
10 
16 
16 
12 
9 


Suppl ier s 


1976 
1975 
1974 

1973 
1972 

1971 


$4.59 
**2.50 
**1.55 
**1 .05 
**1.20 
**1 .20 


*  The  number  of  firms  reporting  is  estimated 


**Estimated  from  graphed  information. 


II I -81 


Table  111-3^ . -Claims  Experience  Since  1 970 , 
by  Size  of  Firm.-(ATMI) 


No. 

of  F 

irms 

No 

. 

of  Firms 

Size  of  Sales 

Re 

porting 

Wi_ 

th 

Claims 

Under  $5  million 

14 

0 

$5  to  $10  million 

28 

3 

$10  to  $50  million 

59 

11 

$50  to  $100  million 

18 

7 

Over  $100  million 

29 

21 

Totals 

148 

42 

Number  of  pending  claims  at  end  of  1970  and  1975 


Size  of  Sales 


No .  of  Pend  ing 
Claims--1970 


Under  $5  million 

0 

$5  to  $10  million 

0 

$10  to  $50  million 

10 

$50  to  $100  million 

0 

Over  $100  million 

15 

Totals 

25 

No  .  of  Pend  ing 
Claims--1975 

0 
1 
5 

l" 
76 
83 


Amount  of  damages  sought  in  pending  claims  at  end 
of  1970  and  1975. 


Size    of   Sales 


Damages 
Sought — 1970 


Damages 
Sought  — 1975 


Under    $5    million 
$5    to    $10    million 
$10    to    $50    million 
$50   to    $100   million 
Over    $100   million 
Totals 


-0- 

-0- 
$      425,000 

-0- 

4,692,500 

$5,  117,500 


$        435,000 

6,460, 000 

250,000 

86,  175,648 

$93,320,648 


III-82 


Table  III-35 ♦ -Product  Liabil ity  Insurance-Average  Annual  Cost 
Per  Thousand  Dollars  of  Sales- (WWEMA) 

Year  Average  Cost             No .  of  Firms 

Sales  under  $1  million 

1975  $3.42  3 

1974  (*) 

1973  2.63  2 

1972  (*) 

1971  (*) 

1970  (*) 

Sales  of  $1  to  $5  million 

1975  $1.18  9 

1974  .59  8 

1973  .57  8 

1972  .48  6 

1971  .47  5 

1970  .34  5 

Sales  over  $5  million 

1975  $1.75  8 

1974  .65  8 

1973  .51  6 

1972  .60  5 

1971  .36  4 
1970  .33  3 


*Inadequate  data. 


III-83 


Table  III-36 . -Claims  Experience  of  Reporting  Firms- (WWEMA) 

New  claims  filed 
Year     New  Claims     Damages  Sought     No.  of  Firms 


1975 

17 

$3,892,000 

11 

1974 

16 

746,000 

12 

1973 

15 

765,000 

12 

1972 

8 

1 ,909,000 

12 

1971 

6 

3,821 ,000 

12 

1970 

5 

273,000 

10 

Claims/suits  pending  at  end  of  year 

Year               Number  Damages  Sought 

1975                26  $10,088,000 

1973                10  6,159,000 

1971                  2  5,075,000 

Table  III-37 . /Product  Liabil ity  Insurance  Premiums- Aver  age 

Percentage  Increases- (RETORT) 

Year        Average  Percent  Increase  No .  of  Firms 

Sales  under  $2.5  million 

1975-76            310  percent  17 

1974-75             75  percent  19 

1973-74             25  percent  17 

Sales  of  $2.5  to  $10  million 

1975-76            550  percent  8 

1974-75             10  percent  10 

1973-74             15  percent  8 

Sales  over  $10  million 

1975-76             60  percent  14 

1974-75             60  percent  15 

1973-74              5  percent  14 


III-84 


Chapter  IV 

Product  Liability 
Prevention  Techniques 


CHAPTER  IV--PRODUCT  LIABILITY  PREVENTION  TECHNIQUES 

INTRODUCTION 

The  Task  Force  has  indicated  that  one  of  the  three  basic 
causes  of  the  product  liability  problem  is  that  some 
manufacturers  produce  some  unsafe  products.  Product  liability 
loss  prevention  techniques  may  help  address  this  cause  and  reduce 
claims.  See  pp.  1-24  -  26.  This  report  analyzes  remedies  that 
might  stimulate  further  use  of  these  techniques.  See  pp.  VII- 
175.  On  the  other  hand,  it  has  noted  that  one  of  the  positive 
impacts  of  the  product  liability  problem  is  that  more 
manufacturers  appear  to  be  devoting  more  time  and  effort  to 
product  safety.  This  chapter  shows  what  the  industry  contractor, 
trade  association  surveys,  and  other  Task  Force  sources  found 
about  the  use  of  product  liability  prevention  programs  in  our 
target  industries. 

It  is  generally  agreed  that  a  direct  way  to  increase  product 
safety  is  to  ensure  that  unsafe  or  defective  products  do  not 
enter  the  market.  Yet,  while  agreement  exists  on  this  point, 
there  is  a  difference  of  opinion  concerning  whether  this  ideal  is 
attainable  even  if  product  liability  prevention  techniques  were 
employed  to  the  maximum  extent  practicable  by  manufacturers.  The 
difference  of  opinion  reflects  individual  beliefs  and  judgments 
as  to  the  causes  of  accidents  and  the  feasibility  of  establishing 
a  "zero  defect"  manufacturing  operation  at  a  reasonable  cost 
about  the  utility  of  product  safety/quality  assurance  programs. 
Our  industry  contractor  examined  three  basic  issues: 

•  The  extent  to  which  Product  Liability  Prevention  (PLP) 
techniques  were  being  used  by  manufacturers. 

•  The  demonstrated  or  perceived  utility  of  these  programs 
in  terms  of  accident  reduction,  reduced  claims,  or  lower 
insurance  costs. 

•  Incentives  or  barriers  to  the  establishment  of  PLP 
programs  . 

On  the  basis  of  the  industry  study  and  other  information  that 
has  come  to  the  attention  of  the  Task  Force,  we  note   that   there 


IV-1 


appears  to  be  a  trend  toward  greater  use  of  product  liability 
prevention  on  the  part  of  manufacturers.  On  the  other  hand,  some 
manufacturers  are  uncertain  as  to  whether  the  programs  reduce 
either  insurance  costs  or  product  liability  claims.  It  would  be 
helpful  if  there  were  more  incentives  for  the  use  of  effective 
PLP  programs.   In  order  to  learn  more,  see  pp.  VI -49  -  52. 

ELEMENTS  OF  A  PRODUCT  LIABILITY  PREVENTION  PROGRAM  (PLPP) 

A  PLPP  may  take  many  forms  and  may  be  identified  under 
various  titles  such  as  product  safety,  product  assurance,  and 
risk  management  practices.  Generally  speaking,  a  comprehensive 
PLPP  will  contain  elements  that  describe  corporate  responsibility 
from  initial  research  and  development  through  sales  and  service 
activities . 

The  _rnajor  elements  that  might  be  included  in  a  product 
liability  prevention  program  are  as  follows: 

•  An  explicit  company  policy  concerning  product  safety, 
quality  control,  and  risk  prevention. 

•  Rigorous  testing  of  the  program  within  the  context  of 
its  use  environment. 

•  A  product  loss  control  committee  headed  by  a  person 
representing  top  management,  who  has  clear  authority  to 
coordinate  loss  control  activities.  Members  of  the 
committee  should  include  representatives  from  research, 
engineering  and  design,  production,  quality  control, 
marketing,  legal,  safety,  and  insurance  departments. 

•  Procedures  to  assure  that  government  standards  and 
regulations  which  apply  to  product  safety  are  understood 
and  considered  at  all  operating  levels  and  are  used  as 
minimum  requirements  in  product  design. 

•  Procedures  for  evaluating  the  potential  for  personal 
injury  or  property  damage  during  use,  or  reasonably 
expected  misuse,  of  proposed  new  products  or  changes  in 
existing  products. 


IV-2 


•  Review  of  existing  quality  control  procedures  in 
relation  to  developing  product  liability  law. 
Procedures  that  are  clearly  defined,  well  understood  and 
closely  followed. 

•  Adherence  to  quality  control  and  inspection  procedures 
that  are  systematically  documented. 

•  Conspicuous  posting  of  warnings  and  instructions  in  a 
permanent  form  where  such  information  is  necessary. 

•  Review  of  all  advertising,  brochures,  labels,  warnings, 
warranties,  and  instructions  by  engineering  and  legal 
departments  to  ensure  that  the  information  provided  is 
accurate,  clear  and  complete. 

•  Permanent  coding  of  components  in  order  to  identify  the 
source,  place  and  date  of  manufacture. 

•  Systematic  procedures  for  investigating  product 
liability  incidents  and  implementing  remedial  measures 
where  necessary. 

•  Maintenance  of  records  through  the  expected  life  of  each 
product,  to  include  information  on  research,  design, 
tests,  quality  control,  sales,  service  and  ownerships. 

THE   IMPLEMENTATION  OF  PRODUCT  LIABILITY  PREVENTION  TECHNIQUES  BY 
MANUFACTURERS 

Introduction 

Virtually  all  PLP  programs  suggested  for  industry's  adoption 
stress  a  number  of  similar  processes  or  practices.  These  include 
quality  control,  design/redesign  review,  labeling  and  packaging 
improvement,  review  of  advertisements  and  warranties  and,  when 
applicable,  greater  emphasis  on  maintenance  and  servicing 
procedures  for  purchased  or  leased  equipment  produced  by  the 
firm  . 

The  results  of  the  Industry  Study's  telephone  survey  with 
respect  to  product  liability  prevention  practices  are  discussed 
below.    Also   included   is   a   discussion   of   the  major  product 


IV-3 


liability    prevention 
manufacturers . 


techniques    that    are    employed 


by 


Results   of    Industry    Study's    Telephone    Survey 


Table  IV-1  displays  responses  to  the  product  liability 
telephone  survey.  The  most  significant  impacts  on  improved 
safety  were  judged  by  the  respondents  to  be  in  the  areas  of 
product  manufacturing  and  quality  control,  product  design  and 
engineering,  and  instructions  and/or  warnings,  in  that  order. 
The  other  aspects  of  product  safety  programs  were  generally 
considered  to  have  little  or  no  impact.  Generally,  the  responses 
were  consistent  across  the  various  company  size  categories. 
However,  for  the  product  safety  programs  designated  as,  "Product 
Design  and  Engineering"  and  "Product  Manufacturing  and  Quality 
Control,"  the  percentage  of  firms  reportin_g_these  programs__as 
being  "not  applicable"  was  inversely  related  to  the  size  of  the 
firim^__ 

Percent    of   Firms    Reporting 
"Not    Applicable"    for    Certain    Product 
Safety    Programs,    by    Size    of   Sales 


Size    of    firms 


Product   design 
and    engineering 


Product  manuf ac tur ini 
and    quality   control 


Less    than    $2.5 

mill  ion 
$2.5  million  to 

$100  million 
$100  million 

and  over 


49.6 
24.4 
12.2 


40.8 

15.  1 

8.7 


The   frequency   of   inspections   by   insurance  carriers'  loss 
prevention  engineers  was  also  related  to  the  size  of  firms. 


lV-4 


Inspections  by  Insurance  Carriers  During 
the  Last  Two  Years,  by  Size  of  Sales 

Size  of  firms       Number  of  firms       Percentage  of  firms 

Less  than  $2.5 

million  39  5M.2 

$2.5  million  to 

$100  million  75  72.1 

$100  million  and 

over,  81  73.6 

Of  the  195  firms  with  inspections  during  the  past  two  years, 
only  82  (42  percent)  reported  that  specific  recommendations  for 
reducing  claims  were  received  from  their  insurance  carriers. 

Thus,  71  percent  of  the  286  firms  surveyed  with  product 
liability  coverage  did  not  receive  advice  from  their  insurers 
during  the  1975-1976  period.  Recommendations  having  the  greatest 
acceptance  were  augmentation  of  quality  control  procedures  (41 
percent),  and  improved  labeling  (21  percent).  It  would  be  useful 
to  know  more  in  regard  to  whether  and  how  manufacturers  followed 
up  on  these  recommendations. 

About  37  percent  of  the  respondents  to  the  telephone  survey 
indicated  that  their  firms  had  a  special  program  directed  at 
reducing  product  liability  claims. 

As  shown  in  Table  IV-2,  larger  firms  were  involved  in  these 
programs  to  a  greater  extent  than  smaller  firms.  Most  of  the 
programs  have  been  in  effect  for  some  time;  approximately  70 
percent  were  initiated  prior  to  1974. 

The  largest  number  of  actions  undertaken  to  reduce  product 
liability  claims  were  directed  toward  improved  labeling  and 
augmented  quality  control  procedures.  There  was  no  significant 
difference  in  this  emphasis  among  the  three  size  categories. 
However,  the  largest  firms  also  engaged  in  product  redesign  to  a 
substantial  degree. 

Approximately  18  percent  of  respondents  indicated  that 
special  programs  to  reduce  claims  for  the  nine  specified  product 
categories  had  been  considered  for  implementation  during  the  past 


IV-5 


year.  The  number  and  percentage  of  firms  considering  such  a 
program,  by  size  category,  are  shown  in  Table  IV-3.  Generally, 
about  two-thirds  of  the  firms  considering  such  programs  plan  to 
augment   quality   control   procedures.    About   45   percent   have 

emphasized  product  design. 

Of  concern  are  the  manufacturers  that  either  do  not  have  or 
plan  to  implement  product  liability  prevention  programs  in  the 
basic  areas  of  design  research  and  quality  control.  While  some 
manufacturers  in  our  target  groups  may  not  require  formal 
programs,  we  must  remember  that  the  target  industries  produced 
relatively  high-risk  products. 

Quality  Control 


This  area  of  product  quality  assurance  ha 
great  emphasis  by  manufacturers  well  befo 
liability  issue  surfaced.  As  an  example, 
contacted  by  the  industry  contractor's  tel 
percent  indicated  that  they  had  product  safe 
with  product  manufacture  and  quality  control, 
of  such  programs,  the  manuf ac tur ing-testing- 
these  programs  was  judged  to  be  most  effec 
limiting  liability  exposure.  We  need  to  kno 
percent  had  no  program.  The  figure  would  appe 
be  of  concern  . 


s  tended  to  receive 
re  the  products 
of  the  337  firms 
ephone  survey,  60 
ty  programs  dealing 
Of  all  the  aspects 
inspection  phase  of 
tive  in  terms  of 
w  more  as  to  why  40 
ar  high   enough   to 


The  amount  of  quality  control  exercised  by  manufacturers  will 
vary  depending  on  the  type  of  product  being  manufactured,  the 
potential  hazard  the  product  affords,  unit  cost,  various 
certification  or  standards  compliance  procedures  and  the  like. 
For  example,  one  aircraft  component  manufacturer  contacted  in 
relation  to  this  study  indicated  that  one  out  of  every  six  of  his 
workforce  is  engaged  in  quality  control.  Pharmaceuticals  are 
illustrative  of  another  product  category  where  exhaustive  quality 
control  practices  are  exercised  not  only  on  the  finished  product 
but  throughout  the  manufacturing  process,  including  evaluation  of 
raw  materials  before  use.  With  the  passage  of  the  Medical 
Devices  Amendments  Act  of  1976,  it  will  follow  that  more 
stringent  quality  control  procedures  will  be  adopted  by 
manufacturers  producing  those  products. 


IV-6 


The  abrasive  wheel  industry  represents  another  sector  where 
strict  loss  control  standards--with  particular  emphasis  on 
quality  control — have  been  adopted  in  order  to  reduce  injuries  or 
hold  down  insurance  costs.  These  programs  which  were  instituted 
many  years  ago  have  been  effective,  at  least  until  recently,  in 
terms  of  the  aforementioned  goals.  However,  a  survey  conducted 
by  the  Grinding  Wheel  Institute  in  1976  indicated  that  for  18 
firms,  which  account  for  about  70  percent  of  grinding  wheel 
sales,  there  have  been  substantial  increases  in  claims  and 
attendant  increases  in  insurance  premiums  since  1970. 

On  the  opposite  end  of  the  spectrum,  there  are  manufacturers 
who  produce  a  variety  of  products  in  large  quantities  at  low  unit 
cost.  Nonferrous  castings  are  one  such  example.  For  many  such 
products  the  only  inspection  to  determine  if  quality  standards 
have  been  met,  may  occur  as  a  part  of  the  finishing  process  when 
obvious  defects  are  discovered  by  the  employee.  However,  since 
the  products  are  often  supplied  to  another  manufacturer,  who  in 
turn  uses  the  castings  as  a  part  of  larger  assembly,  the  part  may 
be  subjected  to  further  testing  and  inspection  before  reaching 
the  ultimate  user;  however,  in  some  cases  one  might  question 
whether  it  is  in  the  interest  of  product  users  to  permit  this 
rel iance . 

Labeling  and  Product  Warnings 

The  results  of  the  telephone  survey  conducted  by  the  industry 
contractor  in  nine  product  categories  indicate  that  for  firms 
which  responded  to  the  question  (273  firms)  ,  about  two-thirds 
placed  some  emphasis  on  the  review  and  improvement  of 
instructions  and  warnings.  For  the  125  firms  which  indicated 
that  special  product  liability  programs  had  been  initiated  as  a 
protective  measure,  about  half  indicated  that  specific  action  had 
been  taken  to  improve  labeling  and/or  warnings.  Those  answering 
the  question  concerning  the  demonstrated  or  perceived 
effectiveness  of  this  PLP  program  element  ranked  activities 
relating  to  instructions  and  warnings  somewhat  lower  than  efforts 
devoted  to  care  in  product  manufacturing  and  quality  control,  but 
of  about  equal  importance  to  design  and  engineering.  Consumer 
groups  or  engineers  may  see  this  "ranking  order"  from  a  very 
different  perspective. 


IV-7 


t 


The  critical  appraisal  and  necessary  revision  of  instructions, 
warnings,  advertisements  and  warranties  can  be  accomplished  much 
more  readily  and  economically  than  other  labor-demanding  aspects 
of  PLP  programs  such  as  design,  engineering  and  quality  control 
activities.  For  ^ t jjj^s  reason  implementation  of  this  segjnent_j)f  a 
total    program    should    be    particularry~atTFactive    to    small    business 


firms    which  may   be    unwilling    or    unaFI~e~to~1aunch   a   more    extensive 

PLP    program. 


Product  Redesign  and  Removal  of  Products  from 

the  Market 

One  measure  of  the  impact  of  PLP  programs  on  industry  derives 
from  an  understanding  of  what  a  firm  does  differently  in  terms  of 
production  or  distribution  of  products  in  order  to  lessen  product 
liability  claims  exposure.  The  industry  contractor  attempted  to 
gain  insights  concerning  these  impacts  by  questioning  firms  which 
have  ongoing  product  safety  or  other  special  programs  designed  to 
reduce  product  liability  exposure.  The  questions  were  designed 
to  elicit  information  on  the  amount  of  redesign  and  retrofit  that 
has  been  instituted  by  firms,  and  the  number  of  products  that 
have  either  been  eliminated  from  production  or  never  introduced 
to  the  market.  Of  the  firms  surveyed,  125  firms  indicated  that 
they  have  some  form  of  special  PLP  program.  Out  of  that  number, 
45  firms  indicated  that  the  redesign  of  one  or  more  products  had 
occurred.  A  smaller  number  (21)  indicated  that  some  type  of 
retrofit  had  been  accomplished. 

In  the  category  of  product  discontinuance,  13  of  the  125 
firms  indicated  that  one  or  more  products  had  been  removed  from 
the  market.  Thirteen  other  firms  which  are  contemplating  the 
establishment  of  a  PLP  program  indicated  that  discontinuance  of  a 
product(s)  was  being  considered. 

Finally,  a  question  dealing  with  the  introduction  of  new 
products  produced  the  finding  that  26  firms  out  of  all  firms 
surveyed  did  delay  or  cancel  the  introduction  of  new  products  as 
a  result  of  product  liability-related  problems. 


IV-8 


Recall  of  Products 

Product   recall  can  become  necessary  when  substantial  product 

hazards  are  Identified  after  the  product  has   reached   the   user. 

However,   these   actions   are  undertaken  rarely,  for  at  least  two 
reasons . 

First,  manufacturers  perceive  that  there  are  only  a  limited 
number  of  cases  occurring  annually  where  such  action  is 
warranted.  For  example,  although  all  manufacturers  of  products 
falling  under  the  jurisdiction  of  the  Consumer  Product  Safety 
Commission  are  required  to  submit  a  notification  of  substantial 
product  hazard,  when  identified,  only  124  notifications  were 
received  by  CPSC  in  FY  1975. 

Further  examination  indicated  that  manufacturers  proposed  a 
recall  of  the  products  in  only  half  the  cases.  Redesign  of  the 
product  and  discontinuance  of  sale  were  offered  as  remedies  in 
many  instances. 

The  second  reason  why  manufacturers  try  to  avoid  resorting  to 
recalls,  particularly  in  the  consumer  product  sector,  is  that 
often  the  product  cannot  be  traced  after  sale.  The  manufacturer 
must  resort  to  advertisements,  news  releases,  etc.,  to  alert  the 
buyer.  Manufacturers  may  not  be  notified  about  existing  claims 
until  a  statute  of  limitations  is  about  to  run.  It  may  be  sound 
to  require  attorneys  who  are  aware  and  have  been  retained  in 
connection  with  a  claim  to  provide  reasonable  notice  to  a 
manufacturer  about  product  defects.  On  the  other  hand,  we  note 
that  manufacturers  may  not  take  prompt  voluntary  action  toward 
recall  because  it  is  expensive,  and  public  notification  of  a 
manufacturer's  error  will  adversely  affect  future  sales. 

Most  PLP  programs  stress  principles  and  practices  which  will 
minimize  the  chances  of  a  recall  action  ever  being  necessary. 
These  programs  do  not  deal  with  the  recall  mechanism  per  se . 
This  makes  a  great  deal  of  sense  with  respect  to  most  consumer 
products.  However,  in  the  case  of  capital  goods  and  equipment,  a 
better  opportunity  exists  to  establish  procedures  which  permit 
products  to  be  traced  even  after  long  periods  of  time. 


IV-9 


IMPLEMENTATION  OF  PRODUCT  LIABILITY 
PREVENTION  PROGRAMS  BY  INSURERS 

Many  insurance  firms  offer  loss  control  and  product  liability 
prevention  services,  usually  in  connection  with  surveying  and 
rating  the  risk  of  an  applicant  for  liability  insurance. 
Furthermore,  firms  which  elected  to  assume  a  larger  proportion  of 
both  risk  and  claims  handling  found  it  in  their  self-interest  to 
increase  the  effectiveness  of  PLP  programs.  However,  the 
provision  of  surveys,  inspections,  and  advice  by  insurers  is  not 
universal  and  appears  to  be  governed  by  many  factors,  including 
size  of  firms. 

In  order  to  obtain  insights  concerning  the  degree  to  which 
insurers  are  providing  these  services,  the  337  firms  surveyed  by 
the  industry  contractor  were  asked  a  series  of  questions 
concerning  whether  insurance  loss  prevention  services  had  been 
received  from  insurers  within  the  last  two  years  and  what  effect 
these  services  were  perceived  to  have  on  the  firms'  operations. 

The  following  statistics  relate  to  firms  which  carry  some 
form  of  product  liability  insurance.  About  68  percent  of  all 
firms  surveyed  which  had  insurance  had  received  such  services 
from  their  carriers  within  the  last  two  years.  Thirty-nine  of 
the  72  firms  with  sales  of  less  than  $2.5  million  a  year 
indicated  that  they  received  such  services  (54  percent).  The 
comparable  rates  for  medium  and  large  firms  were  72  percent  and 
74  percent,  respectively.  About  45  percent  of  firms  receiving 
some  form  of  services  received  suggested  changes  in  manufacturing 
practices  or  for  upgrading  PLP  programs.  These  generally  dealt 
with  the  areas  of  quality  control  and  labeling.  It  would  be 
helpful  to  know  more  in  regard  to  whether  manufacturers  do  or  do 
not  implement  changes  suggested  by  insurers. 

The  insurance  contractor  also  investigated  practices  of 
insurers  in  loss  prevention  and  control.  Their  findings  tend  to 
corroborate  the  Industry  Study  findings.  It  was  determined  that 
66  percent  of  the  sample  of  insurers  have  developed  written 
guidelines  defining  the  type  of  product  that  normally  requires  a 
loss  control  survey  before  an  underwriting  decision  is  made. 


IV-10 


Data  from  underwriting  files  also  indicate  that  large 
companies  are  surveyed  more  often  than  small  firms,  although 
interviews  indicate  that  this  trend  may  be  changing  to  include 
more  smaller  manufacturers. 


/ 


As  discussed  previously  in  this  chapter,  insurers  appear  to 
have  become  more  actively  involved  in  recent  years  in  evaluating 
the  manufacturing  practices  of  their  clients  from  the  standpoint 
of  product  safety  and  potential  liability.  However,  some 
manufacturers  who  have  received  these  services  are  uncertain  as 
to  what  benefits  result.  The  effect  on  premiums  is  not  well 
defined,  nor  are  the  benefits  associated  with  implementation  of 
improved  manufacturing  procedures  necessarily  reflected  by  fewer 
claims  or  reduced  settlements.   See  Industry  Report  at  IV-102. 


It  c 
critical 
product 
clients . 
role  ha 
will  con 
represen 
HoweveTj^ 
liabil it 
by  insur 
insuranc 
expected 
in  these  areas. 


an  be  expected  that  insurers  will  continue  to  assess  more 
ly  the  product  safety  practices  of  manufacturers  and   the 

liability   prevention  programs  being  instituted  by  their 

However,  more  extensive  involvement  by  insurers  in  this 

s   increased  the  cost  of  providing  insurance  coverage  and 

tinue  to  do  so.    For   large   firms,   such   services   may 

t   only   a   small   portion   of   the   total   premium  cost. 

the^c  o  st,_o^  f ,  inspections  ,  periodic  _S]jrjLexSj___and^  other 
y  prevention  insurance  services  which  might  be  provided 
ers  may  add  significantly  to  the  cost  of  providing 
e   coverage   to   small  firms_.__  For  this  reason,  it  may  be 

that  small  firms  will  continue  to  receiv^   Tess   service 


THE  POTENTIAL  USE  OF  PRODUCT  LIABILITY  PREVENTION  PROGRAMS  IN  THE 
FUTURE 

If  product  liability  prevention  programs  (PLPP's)  are  to  play 
a  major  role  in  the  solution  to  the  product  liability  problem, 
then  the  concept  must  be  more  clearly  defined  and  its 
effectiveness  must  be  more  precisely  measured  and  demonstrated. 

For  example,  the  general  elements  of  product  liability 
prevention  programs  tend  to  be  the  same  regardless  of  the  product 
being  produced.  However,  in  practice  they  vary  considerably  as 
applied  in  particular  firms.   When  PLP   elements   are   translated 


IV-1  1 


into    an    industry   or    trade    standard,    they   represent    an    accepted    or 
imposed    minimum    level    of   safety    performance. 

The  impact  of  a  Federal  role  in  the  development  and 
imposition  of  safety  standards  has  sometimes  been  to  make  them 
more  stringent.  The  more  stringent  standards  have  specified 
methods  of  production,  testing,  and  certification  that  support 
the  purpose  of  protecting  the  population,  and  they  may  embody  the 
higher  levels  of  the  state-of-the-art.  The  standard  is  generally 
accompanied  by  a  complementary  system  of  controls  on  the  use  of 
the    product,    by    licensing,    certification,    or    other    regulation. 

Economic  incentives  for  adoption  of  PLPP's  may  be  lacking  at 
the  presehT~~tTfne .  Discussions  with  manufacturers  in  personal 
interviews  and  in  the  telephone  survey  during  the  Industry  Study 
indicated  that  many  are  developing  and  operating  product 
liability  loss  prevention  and  control  programs.  A  significant 
number  further  indicated  that  insurers  have  provided  inspections 
and  audits  of  loss  prevention  practices  and  programs.  However, 
generally,  it  is  the  larger  firms  which  either  have  developed 
these  programs,  or  have  received  services  from  their  carriers. 
Moreover,  many  respondents  further  asserted  that  while  some  of 
the  suggestions  were  helpful,  such  as  augmentation  of  quality 
assurance  activities,  there  was  no  apparent  connection  between 
the  establishment  and  effective  operation  of  a  loss  prevention 
control  program  and  insurance  rate  setting.  Chapter  VII,  p.  177, 
discusses    remedial    measures    in    regard    to    this    problem. 

Manufacturers  want  to  know  how  product  liability  loss  control 
programs  benefit  them  with  respect  to  the  amount  of  premiums 
paid.  However,  the  way  in  which  this  occurs,  and  the  relative 
effect  of  PL?  practices  compared  to  other  factors  such  as  claims 
experience,  or  estimates  of  future  losses,  is  not  being 
communicated  to  many  manufacturers.  Because  offsetting  cost 
savings  may  not  be  identified  or  perceived  to  exist,  further 
expenditures  for  new  or  improved  PLPP's  may  appear  less 
attractive  to  management.  Improvement  in  the  communication  of 
the  direct  monetary  savings  achievable  from  adequate  PLPP's,  from 
the  insurer  to  the  manufacturer,  might  serve  to  foster  wider 
adoption    of   such    programs    in    the    future. 


IV-12 


GOVERNMENT  AND  PRODUCT  LIABILITY  PREVENTION 

The  industry  contractor  reviewed  the  status  of  five  major 
government  programs  relating  to  safety  and  standardization.  From 
this  review  and  analysis,  it  is  apparent  that  government  safety 
enforcement  programs  encourage  companies  to  install  product 
liability  prevention  programs.  However,  the  incentives 
associated  with  PLPP  establishment  and  operation  vary  as  a 
function  of  the  enforcement  program  in  question. 

For  example,  in  the  case  of  OSHA,  the  government  role  is 
minimal  in  terms  of  fostering  the  adoption  of  PLPP's.  The 
government  inspects  only  to  assure  that  firms  are  in  compliance 
with  promulgated  standards.  In  the  case  of  FAA  and  FDA,  there  is 
much  more  of  a  Federal  presence,  which  virtually  assures  that 
companies  subject  to  Federal  standards  governing  aircraft 
certification  or  pharmaceutical  manufacture  have  formal  PLPP's. 
The  quality  of  these  problems  may  still  vary. 


Both  FAA  and  FDA  go  beyond  merely  inspecting  to  determine 
whether  standards  are  or  are  not  being  met.  BecajJse___.ii___insijSts 
that  all  drug  manufacturers  meet  FDA  "good  manufacturing 
practic"eF7"  even  the  srnaTre"st"manufacturer  must"  have   a   PLPP   in 


plac^e.  Similarly,  manufacturers  of  aircraft  and  component  parts 
of  aircraft,  because  of  the  stringent  airworthiness  requirements 
(where  parts  must  be  built  to  standard,  are  subject  to 
maintenance  standards,  and  can  be  required  to  be  recalled  for 
modification  at  any  time),  must  also  have  in  effect  total  PLPP's. 


PRODUCT  STANDARDS 

Many  of  the  nation's  present  standards  programs  consist  of 
the  development  and  use  of  voluntary  industrial  standards 
(important  exceptions  are  OSHA,  FAA,  and  FDA  standards).  The 
problems  in  reaching  an  agreement  on  a  proposed  voluntary 
standard  are  based,  at  least  in  part,  on  economic  tradeoffs  that 
each  potential  standards  user  must  make  in  order  to  develop  or 
accept  the  standard,  based  on  his  particular  environment  and 
posture.  The  measures  that  are  applied  can  often  be  quite 
different  with  respect  to  users  engaged  in  the  same  activities. 
Because  of  this,  agreement   is   often   difficult   to   obtain   and 


IV-13 


compromise  is  required.  When  a  high  degree  of  compromise  is 
required,  it  is  less  likely  that  the  standard  will  be  accepted 
outside  of  the  adopting  industry. 

Two  of  the  organizations  in  the  United  States  are  concerned 
exclusively  with  the  preparation,  approval,  and  publication  of 
voluntary  consensus  standards.  These  are  the  American  Society 
for  Testing  and  Materials  (ASTM)  and  the  American  National 
Standards  Institute  (ANSI).  The  Standards  Development  Services 
Section  (SDSS),  previously  Office  of  Engineering  Standards 
Services  (OESS),  of  the  National  Bureau  of  Standards,  U.S. 
Department  of  Commerce,  has  a  similar  function,  as  do  parts  of 
other  organizations.  A  typical  example  is  the  Codes  and 
Standards  Division  of  the  American  Society  for  Mechanical 
Engineers  ( ASME) . 

ASTM  was  incorporated  for  the  promotion  of  knowledge  of  the 
materials  of  engineering,  and  the  standardization  of 
specifications  and  the  methods  of  testing.  In  1971  a  modified 
program  was  adopted  to  include  the  development  of  standards  on 
characteristics  and  performance  of  materials,  products,  systems, 
and  services,  and  the  promotion  of  related  knowledge.  ASTM  is 
now  concerned  entirely  with  the  preparation  of  standards  and  with 
the  well-being  of  the  voluntary  standards  system  and  is  the 
source  of  more  than  half  the  existing  American  National  Standards 
approved  by  ANSI. 

ANSI  is  also  concerned  with  effectiveness  of  standards.  It 
seeks  to  accomplish  this  through  procedures  for: 

•  Certification  of  standards-making  processes  of  other 
organizations. 

•  Initiation  of  new  standards-making  projects. 

•  Examination  of  standards  prepared  by  others  to  determine 
if  they  meet  the  requirements  for  a  consensus  of 
interested  parties  to  an  extent  suitable  for  approval  as 
American  National  Standards. 

ANSI  organizes,  supervises,  and  controls  the  membership  of 
many  committees  that  prepare  standards  for  approval  under  the 
ANSI   procedures.    Usually   ANSI   does   this   at   the  request  of 


IV-14 


several  of  the  affected  parties  or  when  it  concludes  no  other 
organization  is  suitable  to  carry  out  the  work.  Almost  25 
percent  of  the  American  National  Standards  currently  come  from 
these    committees. 

Safety  standards  are  a  small  minority  of  all  published 
standards.  For  example,  of  the  6,000  standards  approved  to  date 
by  the  American  National  Standards  Institute,  only  4M0  of  them 
apply  to  occupational  safety  and  health,  safety  of  household  and 
industrial  products,  highway  and  traffic  safety,  and  recreational 
safety . 

The  SDSS  manages  the  Voluntary  Product  Standards  program 
established  by  15  CFR,  Section  10.0  (1977).  It  develops 
standards  under  a  prescribed  consensus  procedure.  An  important 
criterion  for  undertaking  the  development  of  a  standard  by  SDSS 
is  that  the  standard  cannot  be  processed  according  to  the  needs 
or  the  desires  of  the  proponent  group  by  a  private  national 
standards  body.  However,  SDSS  finds  it  difficult  to  enforce  this 
rule  in  all  cases.  Some  groups  prefer  to  use  the  SDSS  to  develop 
standards,  believing  the  SDSS  adds  a  "Federal  presence"  that 
makes      the      resulting         standards        more        credible.  Sometimes 

legislative  pressures  encourage  this.  While  the  SDSS  procedure 
is  an  important  stopgap  in  the  voluntary  system,  it  has  processed 
relatively    few   standards--about    three    percent   of   those    extant. 

The  Codes  and  Standards  Division  of  ASME  prepares  the  Boiler 
and  Pressure  Vessel  Code  which  is  now  referenced  in  the  laws  of 
most  states,  most  large  U.S.  cities,  and  all  the  Canadian 
Provinces.  The  ASME  Codes  and  Standards  Division  is  also 
responsible  for  40  performance  test  codes  for  turbines, 
combustion    engines,    and    other    large  mechanical    equipment. 

Trade  associations  also  produce  voluntary  standards  that 
usually  are  a  consensus  of  only  producers  or  suppliers.  The 
standards  may  cover  safety,  interchangeabil ity ,  testing  methods, 
and  other  product  characteristics  which  the  association  members 
believe  are  technically  desirable  to  standardize.  They  describe 
what  the  industry  is  prepared  to  supply,  bi;t  often  t'ncy  require  a 
sophisticated  purchaser  to  understand  t^f^m.  In  some  cases  users 
of  the  product  are  able  to  p.^r  t  ic  i  p.'?  t  o  ,  ?i  t  loast  to  some  extent, 
in       the      development      of      tl"e       5t  .*■■' r' ?irr!  s .         In      other      cases      the 


T'/-l 


associations  rely  on  their  contacts  with  user  organizations  or 
individual  customers  for  user  inputs.  A  number  of  trade 
association  standards  have  gained  national  acceptance. 

Some  of  the  trade  associations  that  have  produced  large 
numbers  of  standards  include  the  Aerospace  Industries 
Association,  American  Petroleum  Institute,  Association  of 
American  Railroads,  Electronic  Industries  Association, 
Manufacturing  Chemists  Association,  and  the  National  Electrical 
Manufacturers  Association.  Some  trade  associations  willingly 
conduct  their  standards-writing  efforts  within  professional 
standards-writing  bodies  such  as  ASTM. 

Professional  societies  in  the  scientific  and  engineering 
fields  usually  have  been  organized  to  advance  their  professions 
or  the  branch  of  science  or  engineering  with  which  they  are 
concerned.  Many  of  the  standards  they  develop  are  of  the 
technical,  nonproduct,  noncommercial  type  (nomenclature, 
graphical  symbols,  test  methods).  Many  others  deal  with 
processes  and  materials  and  components  of  interest  to  the 
profession.  Usually  only  members  of  the  society  serve  on  the 
committees  that  develop  these  standards,  but  the  society 
membership  often  represents  producers,  users,  academia, 
government,  and  other  interests.  Thus,  some  societies  achieve  an 
excellent  balance  of  interests  on  their  standards-development 
committees  . 

There  are  a  number  of  technical  organizations  that  have  been 
formed  for  particular  industries.  A  good  example  is  the 
Technical  Association  of  the  Pulp  and  Paper  Industry.  Their 
membership  includes  all  kinds  of  scientists  and  engineers  who  are 
working  in  the  industry.  Many  of  these  organizations  are  allied 
closely  to  trade  associations  but  operate  much  like  professional 
societies  . 

The  professional  and  technical  organizations  contributing  the 
most  standards  are  the  American  Concrete  Institute,  American  Oil 
Chemists  Society,  American  Society  of  Agricultural  Engineers, 
American  Society  of  Mechanical  Engineers,  Institute  of  Electrical 
-'iri'-j  Rlectronics  Engineers,  Society  of  Automotive  Engineers,  and 
t,ho  ■iv>r:hn  i  cnl  Association  of  the  Pulp  and  Paper  Industry. 


1  V-  1  r 


There  are  also  a  number  of  standards-making  organizations 
that  cannot  be  classified  in  any  of  the  previous  groups.  These 
include : 

(1)  The  National  Fire  Protection  Association  (NFPA)  which 
publishes  National  Fire  Codes  and  the  National 
Electrical  Code  which  serve  as  a  basis  for  state  and 
local  fire  control  and  building  code  ordinances. 

(2)  Underwriters  Laboratories,  Inc.  (UL)  which  develops 
safety  standards,  including  testing  procedures,  for  use 
in  evaluating  and  listing  materials,  products,  and 
systems  for  adequacy  to  prevent  fire,  crime,  and 
casualty.  Many  UL  standards  have  been  approved  as 
American  National  Standards. 

(3)  Factory  Mutual  Engineering  Corporation  (FMEC)  which 
develops  safety  standards  and  testing  procedures  for  use 
in  evaluating  equipment  in  a  manner  similar  to  UL  in 
other  fields.  The  standards  have  wide  recognition  by 
insurance  and  safety  officials  but  are  not  submitted  for 
approval  as  American  National  Standards. 

(4)  The  American  Insurance  Association;  Building  Officials 
and  Code  Administrators,  International;  International 
Conference  of  Building  Officials;  and  Southern  Building 
Code  Congress  prepare  model  building  codes  covering  a 
range  of  products  and  practices.  Many  state  and  local 
governments  apply  these  model  codes  within  their 
jurisdictions.  The  codes  incorporate  or  reference  many 
American  National  Standards  and  standards  of  other 
organizations . 

The  preceding  discussion  indicates  that  voluntary  standards 
have  been  developed  for  a  large  number  of  industrial  products 
and,  to  a  lesser  extent,  for  many  of  the  products  produced  for 
use  by  the  consumer. 

The  report's  discussion  about  the  use  of  these  standards  in 
product  liability  litigation  is  set  forth  at  p.  VII-33. 


IV-17 


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IV-20 


Chapter  V 
Product  Liability  Insurance 


PRODUCT  LIABILITY  INSURANCE 

INTRODUCTION 

Scope  and  Purpose  of  Analysis 

This  Chapter  analyzes  the  functions  of  the  product  liability 
insurance  system  in  order  to  identify  practices  that  have 
contributed  to  product  liability  insurance  problems  and  to 
suggest  ways  in  which  these  practices  might  be  improved. 

Several  information  sources  were  used  in  the  development  of 
this  analysis,  many  of  which  have  become  available  subsequent  to 
the  publication  of  the  Briefing  Report.  The  primary  sources 
relied  on  are  the  contractors'  reports  prepared  for  the  Task 
Force,  the  preliminary  results  of  the  Closed  Claim  Survey 
undertaken  by  the  Insurance  Services  Office  (ISO),  product 
liability  underwriting  experience  through  197^  compiled  by  ISO, 
financial  data  on  the  property-casualty  insurance  industry 
assembled  from  both  company  reports  and  the  trade  press,  and 
testimony  presented  to  the  Subcommittee  on  Capital,  Investment 
and  Business  Opportunities  of  the  U.S.  House  of  Representatives' 
Comm.ittee  on  Small  Business.  The  Insurance  Study  prepared  by 
McKinsey  &  Co.  for  the  Task  Force  was  useful  for  its  discussion 
of  underwriting  practices  and  the  data  presented  in  the  Industry 
Study  prepared  by  Gordon  Associates  for  the  Task  Force 
contributed  to  the  discussion  of  premium  increases  and  their 
variations  among  firms. 

The  approach  used  in  this  chapter  is  based  on  the  objectives 
of  the  system  from  a  public  policy  standpoint.  These  objectives 
relate  to  the  obligations  of  the  system  to  the  parties  served: 

•  insurance  companies  (the  insurer) 

•  product  manufacturers  and  suppliers  (the  insured) 

•  product   users   and   accident   victims,   whether   or  not 
product  users  (the  claimants) 

The  practices  which  are  subsequently  discussed  and  the 
remedies  suggested  should  be  considered  in  relation  to  each  of 
the    objectives.    This   point   is   emphasized   because   of   the 


V-1 


interdependence  of  the  objectives.   A   brief   discussion 
objectives  and  the  issues  within  them  follows: 


of   the 


The  Maintenance  of  Sufficient  Fundinj 
the  Payment  of  Legitimate  Claims 


to  Assure 


The  basic  issue  under  this  objective  is  whether  insurance 
companies  maintain  sufficient  funding  to  assure  potential 
claimants  that  they  will  receive  payment  for  legitimate  claims. 
This  objective  is  important  to  potential  claimants,  but  if  it  is 
over-emphasized  to  the  extent  that  companies  over-reserve,  both 
the  cost  and  availability  of  product  liability  insurance  would  be 
adversely  affected. 

The  Availability  of  Insurance  to  all  Reasonably 
Insurable  Product  Manufacturers  and  Suppliers  at 
a  Cost  Reasonably  Commensurate  With  Product  Risk 

Implicit  in  this  objective  is  the  concept  that  product 
liability  coverage  should  be  made  available  to  those  who  need  to 
purchase  it  and  are  reasonably  insurable.  Insofar  as  insurance 
companies  ultimately  have  to  pay  claims  against  their  insureds, 
however,  the  cost  of  such  coverage  must  be  priced  in  such  a 
manner  that  liabilities,  including  defense  and  other  loss 
adjustment  expense  costs,  are  covered;  i.e.,  the  premium  should 
reflect  the  product  risk.  The  basic  issues  here  are  whether 
premiums  actually  refl_ect_costs  related  to  the  product  risk  and 
whether  premiums  charged  different  policyholders  are  equitable. 
A  primary  policy  conclusion  implicit  in  this  discussion  is  that 
if  premiums  are  soundly  assessed  and  commensurate  with  risk  and 
still  are  too  costly  for  the  insured,  the  solution  probably  lies 
outside  the  insurance  system.  If  the  premiums  are  assessed 
unreasonably,  however,  the  system  should  be  revised.  If  the  data 
available  are  insufficient  to  permit  reaching  a  conclusion  either 
way,  then  means  must  be  found  for  collecting  the  data  necessary 
to  make  valid  judgments  about  proper  rate  levels. 

The  Opportunity  for  Insurance  Companies  to  Make  a 
Reasonable  Profit 

While  the  other  objectives  relate  to  the  needs  of  claimants 
and  the  insured,  this  one  recognizes  that  insurance  co-'ipanies  are 


V-2 


entitled  to  conduct  business  at  an  overall  profit.  This  does  not 
mean  that  insurers  are  entitled,  or  can  reasonably  expect,  to 
make  a  profit  on  every  policy. 

Organization  of  the  Chapter 

Current  concerns  relate  principally  to  the  problems  faced  by 
product  manufacturers  and  suppliers  in  obtaining  insurance  at  a 
cost  they  can  afford.  The  remainder  of  this  chapter  focuses 
primarily  on  that  need  and  the  practices  which  adversely  affect 
it.  Solutions  must,  however,  be  considered  in  relation  not  only 
to  this  need  but  also  for  their  effects  on  the  other  legitimate 
objectives  of  the  system. 

The  subjects  addressed  in  this  chapter  and  the  policy  issues 
within  each  of  them  are: 

The  Product  Liability  Insurance  Policy . — This  section 
describes  the  types  of  policies  that  are  usually  written,  and 
trends  in  coverage  limitations.  This  section  appears  in  this 
chapter  primarily  for  explanatory  purposes.  A  further  discussion 
of  the  trends  and  policy  implications  of  coverage  limitations  is 
to  be  found  in  Chapter  VI. 

The  Underwriting  and  Pricing  Process . — This  section  describes 
the  manner  in  which  product  liability  premiums  are  determined  by 
insurance  underwriters.  It  is  frequently  alleged  by  product 
manufacturers  and  suppliers  that  premiums  are  rising  dramatically 
and  questions  are  raised  concerning  the  basis  for  determining  the 
premium  amount  and  the  relationship  of  that  amount  to  the  risk 
covered.  This  section  addresses  these  issues  and  discusses  means 
by  which  the  system  might  be  improved. 


The 


Rise    in   Product   Liabil ity   Premiums . — This   section 


analyzes  the  data  available  on  premiums  that  have  been  charged  in 
selected  industries  and  compares  premiums  paid  by  firms  in 
different  industries  and  by  company  size  groups.  The  issues 
addressed  include  whether  small  businesses  pay  unreasonably  more 
for  product  liability  insurance  than  large  ones.  (See  also 
pp.  VI-11  regarding  af fordabil ity  of  insurance.) 


V-3 


Underwriting   and   Claims   Experience. --This  section  presents 

data  provided  by  the   Insurance   Services   Office   (ISO)  on   its 

estimates    regarding    underwriting    experience    and  on   the 
preliminary  results  of  its  Closed  Claim  Survey. 


The  Financial  Situation  in  the  Insurance  Industry . — This 
section  presents  aggregate  financial  data  for  the  property- 
casualty  industry  and  for  the  miscellaneous  liability  insurance 
line  which  includes  product  liability  insurance.  The  purpose  of 
this   section   is   to   discuss  overall  capacity   and  underwriting 


experience   and 
availability . 


their   implications   for   insurance   costs 


and 


Reinsurance  and  Surplus  Lines  Insurance. — This  section  seeks 
to  assess  the  role  of  reinsurance  and  surplus  lines  insurance  in 
the  existing  product  liability  insurance  market,  along  with  their 
potential  impacts  on  availability  and  costs. 

Limitations  of  the  Analysis 

The  principal  limitations  on  the  analysis  developed  in  this 
chapter  derive  from  lack  of  data  and  information  specific  to 
product  liability.  Comprehensive  data  are  not  available  on 
product  liability  claims  costs,  payments,  premiums,  reserving 
practices,  amounts  of  product  liability  coverage  provided  by 
reinsurers,  and  other  indicators  of  product  liability  procedures 
used  by  the  industry. 

Although  data  are  limited,  it  was  possible  to  use  the 
available  information  for  some  analysis.  However,  it  should  be 
noted  that  these  evaluations  of  the  financial  situation  in  the 
insurance  industry,  current  reserving  practices,  private 
reinsurance,  impacts  of  underwriting  practices,  and  other  issues 
cannot  be  regarded  as  thorough.  In  the  absence  of  precise 
information  as  to  premiums  attributable  to  product  liability  and 
the  amounts  of  the  unearned  premium  and  loss  reserves 
specifically  allocable  to  product  liability,  it  is  not  possible 
to  determine  the  investment  income  properly  allocable  to  product 
liability  coverages.  It  is  also  not  possible  to  determine 
precisely  the  relationship  of  premium  costs  to  actual  claims 
costs  and,  in  particular,  to  actual  payments  to  claimants. 


V-4 


THE  PRODUCT  LIABILITY  INSURANCE  POLICY 

Introduction 

This  section  gives  a  general  description  of  product  liability 
insurance  policies,  and  discusses  some  of  the  issues  that  have 
arisen  concerning  product  liability  coverage. 

The  typical  product  liability  insurance  policy  consists  of  an 
agreement  between  an  insurance  company  and  a  product  manufacturer 
or  supplier  (the  insured)  whereby,  for  a  price  (the  premium),  the 
insurance  company  agrees  that  it  will  defend  all  claims  and  pay, 
up  to  a  maximum  amount,  all  legal  obligations  of  the  insured 
attributable  to  products  covered  by  the  policy  and  from  which 
damages  were  sustained  during  the  policy  period. 

Product  insurance  usually  provides  coverage  on  what  is  called 
"occurrence"  basis,  whereby  coverage  is  provided  for  all  product- 
related  damages  that  occur  during  the  policy  period.  Neither 
the  time  of  manufacture  of  the  product  nor  the  time  at  which  the 
claim  is  made  determines  whether  the  policy  provides  coverage. 

Types  of  Policies 

Product  liability  coverage  traditionally  has  been  provided 
within  one  of  the  two  major  types  of  primary  policies,  namely. 
Comprehensive  General  Liability  and  Commercial  Multi-Peril 
Package  policies.  Comprehensive  General  Liability  Policies  (CGL) 
can  provide  coverage  for  a  number  of  different  types  of 
liabilities  including  products  liability  and  completed  operations 
coverage  which  covers  liability  for  installation  and  servicing 
work  but  only  after  such  work  has  been  completed  or  abandoned. 
Product  liability,  including  coverage  issued  under  CGL  policies, 
is  predominantly  written  on  a  monoline  basis.  When  it  is  said 
that  such  coverage  is  written  on  a  monoline  basis,  this  simply 
means  that  the  premium  is  allocable  and  allocated  to  the  specific 
hazard  being  insured,  i.e.,  the  products-completed  operations 
hazard.  Package  policies,  which  provide  property  coverage  in 
addition  to  the  third  party  coverages  offered  by  CGL  policies, 
are  frequently  referred  to  as  "multi-line  policies." 


V-5 


Limits  of  Coverage 

Comprehensive  General  Liability  coverage  may  be  limited  in 
two  ways:  1)  the  limit  for  each  occurrence,  and  2)  the  aggregate 
annual  limit  for  all  occurrences  within  the  policy  period.  The 
limits  are  usually  exclusive  of  legal  defense  costs.  If  either 
limit  is  reached,  further  losses  are  uninsured. 

Most  product  liability  insureds  purchase  more  than  the  basic 
annual  limits  which  are  $25,000  per  occurrence  for  bodily  injury 
and  $5,000  per  occurrence  for  property  damage  with  aggregate 
annual  limits  of  $50,000  for  bodily  injuries  and  $25,000  for 
property  damage.  Limits  between  $25,000  and  $1  million  are 
usually  covered  in  the  primary  policy.  Limits  in  excess  of  the 
basic  amounts  can  be  provided  by  "excess"  or  "umbrella"  policies 
which  are  written  in  ^^^___^__  spread  the  1  lability  among 
different  insurers.  (See  pp.  VI-8  for  a  discussion  of  policy 
limitations  as  they  affect  availability  of  product  coverage.) 

Deductibles 

A  deductible  is  that  amount  which  the  insured  agrees  to  pay 
and  which  must  be  exceeded  before  the  insurance  company  pays. 
Deductibles  are  commonly  used  in  personal  lines  of  property 
insurance  (such  as  automobile  collision,  homeowners,  etc.)  where 
they  serve  the  purpose  of  reducing  premiums  through  avoidance  of 
the  cost  of  adjusting  large  numbers  of  small  losses.  Deductibles 
have  not  traditionally  been  used  in  commercial  liability 
insurance.  Both  the  Insurance  and  Industry  Studies  attempted  to 
develop  data  on  this  subject.  The  Insurance  Study  showed  that 
less  than  3%  of  the  3,000  policies  reviewed  included  deductibles. 
Those  companies  with  deductibles  were  distributed  as  shown  in 
Table  V-1 . 

The  Industry  Study  showed  that  in  recent  years  there  has  been 
an  increase  in  the  use  of  deductibiles  among  the  companies 
surveyed.   (See  Table  V-2). 

Occurrence  versus  Claims-Made  Policies 

As  has  been  indicated,  standard  product  liability  coverage 
applies  to  claims  that  are  made  against  the  insured  due  to  bodily 


V-6 


injury  or  property  damage  which  occur  during  the  policy  period. 
Under  a  "claims-made"  policy,  the  insurer  is  only  liable  for 
claims  made  during  the  policy  period. 

It  has  been  suggested  that  the  product  liability  insurance 
problem  might  be  alleviated  if  insurers  changed  from  an 
occurrence  basis  to  a  claims-made  basis.  An  analogy  is  made  with 
medical  malpractice,  where  claims-made  policies  were  introduced 
to  reduce  speculation  in  the  ratemaking  process  and  the  extent  of 
coverage . 

However,  one  must  be  cautious  about  analogizing  between 
medical  malpractice  and  product  liability.  The  "occurrence" 
covered  by  the  malpractice  insurer  is  the  negligent  medical  or 
surgical  procedure  performed  by  the  physician  during  the  policy 
period.  Thus,  if  a  surgical  sponge  were  to  remain  undetected  in 
a  patient  for  ten  years  before  overt  symptoms  erupted,  the 
insurer  having  the  coverage  when  the  surgery  was  performed  would 
have  the  responsibility  for  payment  of  the  loss  under  an 
occurrence  policy.  Where  such  long-delayed  results  are  common, 
an  insurance  actuary  must  try  to  predict  the  cost  of  losses  which 
will  be  paid  many  years  in  the  future.  Changes  in  the  legal 
system  and  inflation  in  the  intervening  years,  make  such 
predictions  extremely  difficult.  Under  a  claims-made  policy, 
these  uncertainties  would  be  el iminated--the  insurer  would  not 
have  to  worry  about  claims  made  in  the  future,  but  only  those 
brought  during  the  current  policy  year. 


The   situation   is  not  quite  the  same  under  product  liability 
insurance . 
the  time  when  the  product  injures  someone. 


The  "occurrence"  is  not  the  time  of  manufacture,   but 


According  to  preliminary  data  from  the  Insurance  Services 
Office,  95.9%  of  bodily  injury  and  96.0%  of  property  damage 
claims  have  been  reported  within  24  months  of  the  occurrence. 
See  ISO  Preliminary  Closed  Claim  survey.  Detailed  Analysis, 
47.  Product  liability  insurers  appear  less  concerned  about  these 
"future"  claims  than  they  are  about  current  claims  based  on 
products  that  were  manufactured  in  the  distant  past.  "Claims- 
made"  policies  cover  lawsuits  of  this  kind;  thus,  they  do  not 
alleviate  insurers'  concerns  about  old  products. 


V-7 


■9 


It  should  be  noted,  however,  that  for  certain  products 
claims-made  policies  may  assist  insurance  actuaries  in  predicting 
and  rewarding  risks.  Examples  include  pharmaceutical  products 
and  organic  chemicals.  (See  Insurance  Study  at  4-46;4-il7.)  With 
respect  to  these  products,  situations  may  arise  where  there  is  a 
substantial  passage  of  time  between  the  time  of  ingestion  or 
other  use  of  the  product  and  the  time  when  the  appearance  of 
overt  symptoms  results  in  a  claim.  Insurance  actuaries  may  have 
difficulty  (analogous  to  the  medical  malpractice  situation) 
predicting  how  many  claims  involving  delayed  manifestations  of 
symptoms  will  arise  in  the  future.  Moreover,  it  may  be  necessary 
for  insurers  to  set  aside  substantial  amounts  of  funds  in 
incurred -but-not-reported 
type. 


substantial 
(IBNR)    reserves  for  products  of  this 


Claims-made  policies  offer  an  advantage  aside  from  better 
risk  prediction.  In  that  regard,  there  may  be  difficulty  in 
determining  the  date  of  the  "occurrence"  of  the  product  injury  so 
as  to  ascertain  which  product  liability  coverage  is  applicable. 
See  Volume  VII,  Legal  Study  at  93.  On  the  other  hand,  it  is 
always  clear  when  a  claim  is  made. 

Claims-made  coverage  may  help  resolve  these  problems,  but  it 
could  create  a  problem  for  victims  in  situations  where  a  company 
had  gone  out  of  business  since  the  time  the  initial  injury- 
causing  event  occurred:  there  would  be  no  coverage  for  such  an 
incident  at  the  time  the  claim  was  made.  If  a  corporation  were 
to  go  out  of  business  or  to  merge,  there  might  be  a  need  to 
require  that  occurrence  basis  insurance  be  available  for  claims 
made  after  the  company  has  gone  out  of  business.  This  is  one 
form  of  "tail  coverage." 

There  is  one  facet  of  claims-made  malpractice  coverage  that 
may  cause  problems  if  it  were  brought  over  to  the  area  of  product 
liability.  According  to  Howard  B.  Clark,  Special  Assistant  to 
the  Administrator  of  the  Federal  Insurance  Administration,  most 
claims-m.ade  medical  malpractice  insurers  require  that  the  insured 
have  claims-made  coverage;  written  by  the  same  company,  both  at 
the  time  when  the  professional  service  was  performed  and  when  the 
claim  is  made.  If  the  analogy  were  made  in  the  area  of  product 
liability,  a  manufacturer  might  be  required  to  have  maintained 
claims-made  coverage  at  the  time  his  product  was  manufactured  and 


V-8 


at  the  time  of  the  injury  and  at  the  time  of  the  claim.  If  these 
coverage  limitations  were  included  in  a  claims-made  product 
liability  policy,  they  might  result  in  some  insureds  being 
without  coverage  for  some  products  they  had  manufactured  in  the 
past--this  consequence  would  not  appear  to  be  in  the  interest  of 
either  consumers  or  manufacturers.  Compare  Rotwein  v.  General 
Accident  Group,  103  N.J.  Super.  370,  24?  A.  2d  370  (1968) 
(architect  policy — upholding  provision  requiring  insured  to  have 
maintained  claims-made  coverage  at  the  time  of  the  negligent  act) 
with  Jones  v.  Continental  Ins.  Co.,  123  N.J.  Super.  91  303  A.  2d 
91  (1973)  (architect  policy  holding  invalid  a  provision  requiring 
insured  to  have  maintained  claims-made  coverage  by  the  same 
insurer  at  the  time  of  the  negligent  act.)  It  has  been  suggested 
to  the  Task  Force  Staff  that  this  problem  can  be  easily  remedied 
by  eliminating  the  "retroactive  date"  concept.  (See  letter  to 
the  Project  Director  from  R.  Clements,  10/20/77.) 


In  sum,  claims-made  policies  would  reduce  the  degree  of 
speculation  in  the  ratemaking  process  only  with  regard  to 
products  that  involve  the  degree  of  long  time  spans  between  the 
time  of  an  initial  injury  and  the  time  that  the  injury  manifests 
itself.  If  claims-made  policies  are  utilized  in  product 
liability,  care  must  be  exercised  to  avoid  coverage  gaps  that 
could  adversely  affect  consumers  and  manufacturers. 


/ 


THE  UNDERWRITING  AND  PRICING  PROCESS 


Introduction 


The  underwriting  process  encompasses  both  the  decision  by  the 
insurer  whether  to  accept  the  risk  at  all,  and,  the 
determination  of  the  appropriate  premium  for  the  risk;  i.e.,  the 
price  that  will   be   charged   for   the   coverage.    This   section 

o 

focuses  predominantly  on  the  means  used  to  develop  premium  rates 
and  the  increases  which  have  been   made   recently   in   the   rates 
developed   by  the  Insurance  Services  Office  (ISO),  the  industry's 
primary    statistical    compilation     and     rate     development 
organization . 


The   price   (premium)  which  will  be  charged  for  product  liability 
coverage  is  determined  in  the  underwriting  process.   Ideally,  the 


V-9 


price  an  insured  pays  should  reflect  the  actual  product  risk. 
Such  a  price  could  be  developed  by  determining  the  number  of 
products  in  the  field,  applying  a  rate  developed  for  use 
throughout  the  industry  which  would  reflect  the  expected 
incidence  and  cost  of  injury  associated  with  the  product, 
appropriately  modified  by  the  prior  claims  experience  of  the 
specific  firm.  With  the  addition  of  a  profit  allowance, 
administrative  costs  and  fees,  the  premium  for  a  given  firm  would 
be  established . 

In  fact,  the  underwriting  process  is,  at  best,  an 
approximation  of  the  foregoing.  For  most  products  coverage, 
neither  the  insurance  companies  nor  the  Insurance  Services  Office 
(ISO)  have  more  than  subjective  estimates  of  the  probable  risk 
upon  which  to  predicate  premiums.  The  result  is  that  most 
premiums,  in  the  final  analysis,  amount  to  "informed  best 
guesses"  of  the  individual  underwriter. 

The  Working  Task  Force  representative  from  the  Federal 
Insurance  Administration  has  observed  that  such  "informed  best 
guesses"  are  affected  by  such  things  as  the  competitive 
environment,  the  insurer's  overall  capacity  or  limitations  on 
the  capacity  that  the  management  is  willing  to  devote  to  the 
line,  potential  defense  costs  that  may  be  insured  and  myriad 
other  factors. 

There  are  different  methods  by  which  products  coverage  is 
provided  and  premiums  are  determined.  Table  V-3  identifies  the 
types  of  methods  used  and  the  percent  of  the  product  liability 
premium  that  each  represents.  An  explanation  of  the  various 
methods  follows: 

10 
Manual   Rated   (monoline   ).--This   is  the  only  rating  method 

which  uses  published  rates  which  have  been  statistically   derived 

from   reported   claims   experience.   Manual  rates,  that  is,  those 

rates  which  are  published  in  ISO's  Product  Liability  Manual,   are 

given  for  65%  to  75%  of  the  over  400  product  classifications  used 

by  ISO.   Policies  for  which  these  rates  apply   account,   however, 

for   only   between   10%   to   15%   of   the  total  product  liability 

premium  according  to  ISO  estimates.   Manual  rates   are   available 

for  low  risk  products  and  usually  only  apply  to  small  firms  since 

large  firms  are   more   likely   to   use   package   policies   or   be 


V-10 


eligible  for  the  special  rating  plans  (loss  rating  etc.). 
Premiums  for  manual  rated,  monoline  policies  are  determined  by 
insurers  by  multiplying  the  published  rate  by  the  number  of 
"exposure  units."  The  actual  exposure  units  would  be  the  number 
of  products  covered  by  the  policy  that  are  and  will  be  in  use 
throughout  the  policy  period.  Usually,  however,  a  surrogate  for 
exposure  units  such  as  gross  sales  or  receipts  is  used.  Most 
manual  rates  are  stated  as  an  amount  per  one  thousand  dollars  of 
sales  or  receipts. 

Small  (a)  Rated  ( monoline) . --This  method  is  used  in 
establishing  premiums  for  firms  with  monoline  policies  which 
produce  products  for  which  there  is  either  a  high  degree  of 
variability  in  claims  experience  or  too  little  data  on  claims 
experience  reported  for  ISO  to  be  able  to  calculate  statistically 
valid  rates.  No  statistically  reliable  rates  are  available  for 
these  product  classes.  Thus,  in  the  Product  Liability  Manual, 
the  symbol(a)  is  given  rather  than  a  specific  rate  for  those 
product  classes  which  are  (a)  rated.  Approximately  25%  to  35%  of 
the  total  number  of  classes  are  (a)  rated.  ISO  estimates  that 
the  (a)  rated  monoline  policies  represent  30%  to  35%  of  the  total 
product  liability  premium.  ISO  does  provide  suggested  rates  for 
the  (a)  rated  classes.  These  suggested  rates  are  intended  as  a 
rough  indication  of  the  average  rate  appropriate  for  the  class  as 
a  whole  and  they  are  given  only  as  guidelines.  They  are 
subjective  estimates  and  not  statistically  reliable.  Insurers 
may  use  them,  adjust  them  or  ignore  them.  In  effect,  therefore, 
premiums  for  (a)  rated  monoline  policies  are  based  on  the 
subjective  determination  of  individual  underwriters  and,  as  such, 
amount  to  "informed  best  guesses." 

Package  Policies. — Package  policies  are  multiline  policies. 
They  account  for  approximately  30%  of  the  total  product  liability 
premium.  The  package  policy  premium  is  determined  by  using  the 
monoline  rates  (the  manual  and  (a)  rates)  modified  by  a  package 
discount.  An  experience  factor  may  also  be  used  in  calculating 
the  premium. 

1  1 
Composite   Rated   . — This  type  rating  is  used  for  large  firms 

producing  different  types   of   products.    A   composite   rate   is 

calculated   initially   on   the   basis  of  a  survey  of  the  separate 

exposures  using  the  appropriate  manual  rate  when  such  applies  and 


V-1  1 


presumably  selecting  a  factor  for  (a)  rated  products.  The  sum  of 
the  rates  and  exposures  is  then  divided  by  a  selected  exposure 
base.  ISO  requested  that  composite  rating  for  product  liability 
(except  for  Loss  Rating)  not  be  used  after  January  1,  1977. 

Loss  Rated. — This  rating  method  which  is  a  form  of  Composite- 
rating,  uses  past  losses  to  determine  the  premium.  Only 
companies  which  have  $200,000  or  more  of  losses  at 
$10,000/$10,000/$10,000  limits  over  the  prior  three  years  are 
eligible  for  loss  rating. 

Large  (a)  Rated. — According  to  ISO,  the  rates  for  very  large 
companies  are  determined  "on  the  basis  of  the  specific 
characteristics   of   that  risk  rather  than  on  the  class  or  manual 

i3uG»  •  •  • 


It  is  relevant  to  note  that  when  insurers  recently  responded 
to  a  congressional  inquiry  regarding  their  product  liability 
ratemaking   procedures,  they  reported  that  they  rely  primarily  on 


ISO   rates 


with 


the    "judgment"    of    individual 


combined 

1  3 
underwriters.      Each   company   also   responded   that   sales  and 

receipts  were  the  measure  of  exposure   used.    Only   one   company 

referred  to  a  consideration  of  numbers  of  products.   Each  company 

also  reported  that  records  of  exposure  were  kept  only  in  terms  of 

dollar   figures   or   that   such   records   were   submitted   to  ISO 

pursuant  to  the  Statistical  Plan,  but  company   records   were   not 

kept . 


From  the  foregoing  discussion  it  can  be  noted  that  for 
product  liability  underwriting,  published  rates  are  available 
only  for  manual  rated  risks  which  amount  to  only  about  10%  of  the 
total  product  liability  premium.  In  respect  to  the  vast  majority 
of  product  liability  premiums,  statistically  reliable  rates  are 
not  available  and  the  line  is  essentially  unregulated,  in  fact, 
if  not  in  theory.  Thus,  for  product  liability  insurance,  except 
for  the  approximately  10%  manual  rated  business,  it  really  does 
not  matter  whether  the  State  is  a  "prior-approval"  State  in  which 
no  insurer  may  use  any  rate  unless  it  has  been  filed  with  and 
approved  by  the  regulator  prior  to  its  use,  or  whether  it  is  an 
"open-competition"  or  "file  and  use"  State  in  which  the  insurer 
may  use  a  rate  without  prior  approval  subject  to  a  subsequent 
disapproval  by  the  regulator  if  the  latter  establishes   that   the 


V-12 


rate    is   inadequate,   excessive,   unfairly   discriminatory, 
otherwise  unlawful  under  the  rate  regulatory  law. 


or 


ISO  Rate  Increases 

The  rate  increases,  established  by  ISO  in  August  1976  and 
December  1976,  provide  an  indication  of  the  magnitude  of  product 
liability  premium  increases  which  have  occurred  and  are  likely  to 
occur  in  the  near  future.  For  a  discussion  of  the  relationship 
between  rates  and  premium  increases,  see  pp.  V-28.  ISO 
determines  the  need  for  an  overall  increase  in  rates  based  on 
trend  projections  of  actual  and  estimated  losses  from  prior 
policy  years.  Having  determined  the  amount  of  an  overall  average 
increase  in  rates,  ISO  assigns  weights  to  individual  product 
classes.  These  weights,  based  on  the  limited  experience  data 
reported  to  ISO  (see  table  V-3)  and  subjective  judgments,  are 
used  to  factor  the  individual  rates  so   that   in   aggregate   they 

will   yield   the   overall  average  rate  increase  previously  deemed 

1  6 
necessary 

Table  V-4  is  a  representative  listing  of  percent  increases  in 
product  liability  insurance  rates  established  in  December  1976 
over  those  in  effect  in  August  1975  rates  for  a  compilation  of 
product  liability  rates  provided  by  ISO.  The  compilation 
includes  only  rate  increases  in  excess  of  100%. 

Table  V-4  shows  increases  in  basic  limit  rates  to  the  extent 
that  a  firm  chooses  to  purchase  higher  limits  of  liability, 
higher  premium  rates  will  apply.  Table  V-5  shows  the  increased 
limits  factors  currently  in   use   for   monoline   rated   products. 

Table  V-6  shows  rates  per  $1,000  of  sales  for  selected  products 
if  insurance  limits  of  $250,000  bodily  injury  and  $50,000 
property  damage  per  occurrence  were  purchased. 

The  1976  basic  monoline  rates  and  increased  limits  factors 
developed  by  ISO  and  used  in  these  comparisons  are  the  most 
current  product  liability  rates  in  use  and  will  be  impacting 
insurance  policy  renewals  nationwide  for  the  next  12  to  18 
months.  It  appears  safe  to  conclude  that,  for  most  of  the 
monoline  rated  products  classes,  insurance  costs   have   increased 


V-13 


or  will  increase  and  that  some  of  these  increases  will  be 
substantial.  As  is  noted  on  p.  V-28,  continued,  reliance  on  the 
current  methodology  for  determining  the  need  for  rate  increases 
could  result  in  further  rate  increases  in  the  near  future. 

ISO  Statistical  Compilation  Activities 

Although  most  premiums  for  product  liability  coverage  are 
determined  quite  subjectively  by  individual  insurance  companies, 
increasing  attention  is  being  given  to  the  development  of  more 
statistically  reliable  rates  for  product  liability  based  on 
pooled  experience.  The  primary  advantage  of  an  industry-wide 
statistical  agency  for  the  gathering  and  compilation  of 
statistical  data  lies  in  its  potential  ability  to  establish  a  far 
broader  data  base  than  could  be  garnered  by  any  individual 
company . 

The  Insurance  Services  Office  (ISO)  is  currently  attempting 
to  expand  its  data  base  and  improve  its  ratemaking.  This  section 
discusses  the  potential  utility  and  current  limitations  of  ISO 
data  collection. 

ISO  utilizes  a  Statistical  Plan  to  collect  premium  and 
experience  data  from  its  members  and  subscribers.  As  of  June  1, 
1977,  the  Statistical  Plan  for  general  liability  used  by  ISO  and 
its  subscribing  insurance  carriers  was  changed.  The  experience 
of  all  composite  rated,  experience  rated  and  large  (a)  rated 
policies  is  to  be  broken  out  in  monoline  product  detail  by 
product  code  except  for  risks  with  general  liability  aggregate 
losses  of  over  $100,000  annually.  The  loss  experience 
attributable  to  the  product  liability  portion  of  commercial 
multiperil  policies  is  also  being  broken  out  in  monoline   detail. 

The  data  using  the  new  Statistical  Plan  will  not  be  sent  to 
ISO  by  the  insurers  until  after  the  1977  policy  year  is  over, 
that  is,  sometime  in  1978.  Unless  an  unusually  vigorous  effort 
is  undertaken,  the  data  will  not  become  available  until  1979. 

Exposure,  claims,  and  loss  data  should  be  obtained  in  usable 
form  sufficient  to  permit  determination  not  only  of  indicated 
general   rate   levels  of  the  line  but  of  classes  within  the  line. 


V-14 


The   current   ISO   classification  plan  contains  over  MOO  separate 
classifications. 

To  be  statistically  sound,  rates  for  each  product  class 
should  be  based  on  the  claims  experience  per  unit  of  exposure 
that  has  occurred  in  the  past.  That  is,  assessments  of  the 
probability  of  claims  in  the  future  for  a  given  class  should  be 
based  on  knowledge  of  claims  in  the  past.  Other  factors  will 
continue  to  be  used  in  setting  individual  premiums. 

The  procedure  currently  used  by  ISO,  and  described  in  this 
Chapter,  is  based  on  aggregated  incurred  losses  for  each  policy 
year.  In  essence,  the  procedure  amounts  to  determining  whether 
premiums  have  been  adequate  to  pay  for  incurred  losses  and  making 
adjustments  in  rates  accordingly. 

The  ISO  procedures  to  date  result  in  rates  for  most  products 
liability  that  are  not  statistically  sound.  The  rates  are  not 
necessarily  reflective  of  actual  claims  experience  within  each 
class . 

Indications  are  that  claims  are  not  generated  with  sufficient 
frequency  to  allow  rates  to  be  established  for  each  existing 
class  without  resorting  to  weighting  of  individual  class 
experience  with  the  experience  from  groups  of  classes.  It  should 
be  noted  that  for  many  products  for  which  insurance  premiums  are 
very  high,  claims  experience  is  not  generated  with  great 
frequency.  That  is,  there  are  not  many  accidents  that  lead  to 
product  liability  claims  for  the  product;  yet,  when  there  is  a 
claim,  it  can  be  a  large  one.  Time  is  also  needed  to  generate 
data  for  new  products. 

When  spread  over  the  thousands  of  products  manufactured,  and 
given  the  numerous  product  classes  used  by  ISO,  the  data  base 
will  not  become  statistically  sound  in  a  short  time,  if  ever,  for 
certain  existing  product  classes. 

That  data  for  ratemaking  purposes  would  be  generated  slowly 
through  a  process  using  reports  of  companies  that  subscribe  to 
ISO  is  shown  clearly  in  the  preliminary  data  from  the  Closed 
Claim  Survey.  After  having  received  data  from  approximately 
7,800  closed  claims,  the  Preliminary  Report  indicates  that  only  6 


V-15 


claims  were  closed  with  nonzero  payment  in  connection  with  metal 
cutting  machine  tools  (product  code  205)  metal  forming  tools 
(product  code  206),  accessories,  attachments  and  auxiliary 
equipment  for  machine  tools  (product  code  207),  and  tools  for 
machine  tools  (product  code  208). 

For  product  code  205,  there  was  one  bodily  injury  claim 
closed  with  payment  of  $1,500;  for  product  code  206,  there  was 
one  bodily  injury  claim  closed  with  payment  of  $1,250.  Product 
code  207  generated  two  bodily  injury  claims  with  payments 
totaling  $235,000  and  two  property  damage  claims  with  payments 
totaling  $9,3^5.  Product  code  208  generated  no  claims  with 
payment . 

Although  these  are  preliminary  results  from  the  ISO  Closed 
Claim  Survey,  they  would  indicate  that  even  a  12-month 
compilation  might  yield  only  about  24  claims  with  payment  for 
these  product  categories.  The  sparsity  of  the  data  indicates 
that  statistically  reliable  data  for  some  product  claims  take 
several  years  to  accumulate.  The  problem  could  be  overcome  by 
expanding  product  categories  to  include  as  many  products  with 
similar  risk  characteristics  as  needed  to  produce  statistically 
reliable  data. 

The  new  Statistical  Plan  will  eventually  provide  a  somewhat 
sounder  basis  for  some  product  liability  insurance  ratemaking  but 
not  in  a  short  time.  Nor  does  there  appear  to  be  a  means  of 
accelerating  the  process  since  data  will  still  have  to  come  from 
insurance  companies  after  the  end  of  each  policy  year,  and  there 
will  still  be  a  required  period  for  processing. 

While  preferable  to  the  existing  lack  of  data,  historical 
claims  experience  can  never  be  expected  to  be  a  precise  indicator 
since  changes  in  laws,  inflation  and  other  externalities  may 
cause  deviations  from  the  projections.  For  example,  an  item  of 
sports  equipment  which  was  never  involved  in  a  successful  claim 
in  the  past,  although  there  may  have  been  numerous  injuries, 
could,  next  year,  generate  a  successful  claim  which,  in  turn, 
might  well  produce  a  spate  of  similar  claims. 

Regulation  of  product  liability  rates  has  been  suggested  as 
one  possible  way  of  controlling  premium  costs.   Under  regulation, 


V-16 


insurers  would  be  required  to  justify  their  rates.  The  problem 
is  that,  without  a  reliable  data  base  from  which  claims 
experience  can  be  evaluated,  it  is  not  possible  to  determine  with 
any  degree  of  accuracy  what  a  reasonable  rate  would  be.  Although 
rate  regulation  may  be  appropriate,  the  first  step  must  be  the 
development  of  a  valid  experience  base.  If  such  a  data  base  were 
established  it  would  be  possible  to  utilize  actual  claim  trends 
as  a  base  for  establishing  premiums  and  justifying  rates.  The 
issue  of  whether  or  not  participation  by  all  product  liability 
insurers  in  the  data  collection  effort  can  be  achieved 
voluntarily  or  should  be  mandated  should  be  considered. 

THE  RISE  IN  PRODUCT  LIABILITY  PREMIUMS 

Introduction 

The  primary  reason  that  the  Task  Force  was  organized  and 
directed  to  study  product  liability  was  the  concern  expressed  by 
business  firms  about  product  liability  insurance  costs  and  the 
difficulties  faced  by  many  firms  in  obtaining  product  liability 
coverage . 

Although  there  is  significant  evidence  of  product  liability 
premium  increases,  other  data  related  to  product  liability 
premium  and  claims  trends  are  not  available.  One  indication  of 
the  inadequacy  of  data  is  the  fact  that  the  total  aggregate 
product  liability  premium  in  the  U.S.  is  not  known.  The  rates  at 
which  premiums  for  product  liability  have  increased  are  only 
roughly  estimated  in  the  Insurance  and  Industry  Studies. 
However,  the  belief  that  the  increases  have  been  high  can  be 
supported  by  the  available  data.  Trends  in  the  number  and 
severity  of  product  liability  claims  cannot  be  determined  from 
the  available  data.  It  is,  therefore,  not  possible  to  correlate 
premium  increases  with  trends  in  the  number  and  severity  of 
claims . 

The  trend  in  premium  increases  is  apparent  both  in  the 
substantial  basic  rate  increases  for  certain  product  lines  which 
have  been  developed  by  the  Insurance  Services  Office  and  by  the 
pricing  policies  of  insurance  underwriters  as  evidenced  by  the 
premium  increases  experienced  by  companies  surveyed  by  the 
industry  contractor. 


V-17 


The  Insurance  Study's  estimate  of  the  effect  of  ISO  revisions 

on  product  liability  premium  rates  is  shown  in  Table  V-7.    (Note 

that   this   table  does  not  reflect  December  1976  revisions  in  (a) 
rates. )   See  p.  VI-1 1 . 

The  insurance  contractor  used  the  results  of  the  underwriting 
file  survey  to  estimate  the  impact  of  rate  changes  on  rates 
actually  used  to  establish  premiums.  The  results  were  reported 
in  the  Insurance  Study  as  follows: 

".  .  .To  obtain  a  clearer  picture  of  rate  changes  that 
have  taken  place  in  (a)  rated  categories,  we  analyzed 
underwriting  files  that  contained  identical  product 
classifications  from  197^  to  1975.  Unfortunately,  the  small 
number  of  companies  for  which  these  data  are  available  make 
the  average  increases  shown  less  credible  than  would  be  the 
case  if  a  larger  sample  had  been  available.  Further,  the 
wide  variation  in  high  and  low  increases  point  up  the 
variation  in  individual  risk  pricing  decisions.  Finally,  it 
should  be  noted  that  these  findings  are  not  representative  of 
the  total  change  in  rates  because  the  product  liability 
policies  that  are  composite  rated,  loss  rated,  and  rated  on  a 
retrospective  basis  could  not  be  included  in  this  analysis 
since  individual  product  rates  are  merged  with  rates  for 
other  coverages.  These,  of  course,  are  the  larger  accounts, 
representing  a  fairly  small  percentage  of  the  total  policies 
but  a  significant  proportion  of  the  total  premium. 
Therefore ,  al though  the  data  clearly  show  that  rate  increases 
have  occurred ,  the  stated  average  increases  shown  should  be 
viewed  with  caution;  the  sample  is  far  too  small  to  be 
representative  of  the  practices  of  the  industry . 


".  .  .With  the  preceding  caveats,  our  analysis  showed 
that  rates  Vn  the  eight  target  classifications  had 
experienced  average  rate  increases  ranging  from  a  low  of  ^9% 
to  a  high  of  568%.  The  average  rate  increase  for  all 
products  outside  the  eight  target  product  classifications  was 
251%.  .  ." 


The  results  of  the  Insurance  Study's  analysis  referred  to 
above  are  given  in  Table  V-8.  The  ranges  appear  more  significant 
than  the  averages  since  the  ranges  are  so  great. 


V-18 


In  the  survey  undertaken  by  the  industry  contractor,  premium 
costs  per  $1,000  of  total  sales  were  examined.  Table  III-6 
indicates  the  1971-1976  experience  of  the  firms  surveyed. 

The  causes  of  the  premium  increases  are  more  difficult  to 
ascertain  than  the  fact  of  the  increases.  Since  product 
liability  premiums  are  determined,  generally,  by  applying  a  rate 
to  an  individual  firm's  total  sales,  there  is  an  escalation  of 
premium  by  reason  of  an  increase  in  sales,  an  increase  in  product 
price,  or  a  combination  thereof,  even  though  there  has  been  no 
increase  in  the  rate  itself  .  In  a  limited  sense,  therefore, 
inflation  benefits  insurers  in  that  it  increases  the  sales   base. 

The   latest   data   available  to  the  Task  Force  indicate  that, 

for  at  least  some   industries,   increases iji_  product   liability 

jjLSimance p^remiums aje  continuing.   A  survey  conducted  in  April 

1977  by  the  Machinery  and  Allied  Products  Institute  (MAPI)  found 
that  over  90%  of  the  respondents  had  experienced  increased 
product  liability  insurance  costs  since  the  original  MAPI  survey 
in  August  1976^°.  Thus,  there  is  some  evidence  that  premium 
increases  have  not  leveled  off  as  the  Insurance  Study  (p.  ES-4) 
had  suggested  they  might. 

•^  A  Comparison  Between  Small  and  Large  Businesses  '^ 

In  commenting  on  the  severe  increase  in  insurance  costs  in 
connection  with  industrial  machinery,  industrial  chemicals, 
automotive  component,  and  pharmaceutical  manufacturers,  the 
Insurance  Study  concluded:  "The  problem  of  availability  and 
af fordabil ity  of  product  liability  insurance  is  concentrated  in 
the  smaller  firms  in  those  industries."   (ES-7,  Insurance  Study). 

The  data  developed  by  the  Task  Force  seem  to  substantiate  the 
supposition  that  small  firms  are  experiencing  greater  premium 
increases  than  are  larger  firms. 

The  results  of  the  survey  conducted  by  the  industry 
contractor  show  that  small  firms  experienced  significantly 
greater  increases  than  large  firms  in  premium  rates  per  $1,000  of 
sales  for  both  Comprehensive  General  Liability  ( CGL )  as  well  as 
for  Product  Liability. 


V-19 


Table  III-5  (Chapter  III)  from  the  Industry  Study  presents 
the  calculated  costs  for  CGL  coverage  per  $1,000  in  total  sales 
for  the  years  1971-1976  by  size  groups.  Although  all  firms 
experienced  increases,  it  appears  that  the  larger  firms  have  a 
substantially  lower  cost  for  CGL  than  small  and  medium-size 
firms,  and  the  size  of  the  differential  is  increasing. 

Table  III-7  (Chapter  III)  shows  the  estimated  average  cost 
per  $1,000  of  total  sales  for  product  liability  by  product 
groupings.   See  Table  III-6. 

^--  On  the  basis  of  the  Industry  Study  Survey,  it  appears  that 
the  premium  differential  between  large  and  small  firms  cannot  be 
explained  on  the  basis  of  product  risk.  Table  V-10  indicates 
that  in  seven  of  the  nine  product  categories  for  which  data  were 
collected,  firms  with  less  than  $2.5  million  in  total  sales  had 
higher  rates  for  CGL  per  $1,000  of  total  sales  than  their  medium- 
size  counterparts  and  that  in  all  product  categories,  larger 
firms  had  rates  less  than  one-half  those  of  the  other  firms.  (It 
should  be  noted  that  while  the  medium-size  firms  include  firms 
with  gross  sales  of  $2.5  million  to  $100  million,  24.6%  of  the 
respondents  in  the  group  had  gross  sales  of  less  than  $5  million, 
while  47.7%  of  the  respondents  had  gross  sales  of  less  than  $10 
mill  ion .  ) 

An  alternative  explanation  has  been  suggested  by  Mr.  John  F. 
O'Sullivan,  Vice  President  of  Marsh  &  McLennan,  Inc.,  in  a  report 
prepared  on  behalf  of  the  National  Association  of  Insurance 
Brokers  (NAIB)  and  presented  to  the  Senate  Small  Business 
Committee  on  September  8,  1976,  in  which  he  said: 

".  .  .The  insurance  companies'  response  to  their  present 
predicament  has  a  severe  impact  on  small  businesses.  Since 
many  small  firms  have  the  same  potential  liability  exposure 
as  the  larger  firms  which  generate  much  greater  premium,  the 
■■^^  natural  tendency  is  not  to  spend  time  making  a  detailed 
analysis  of  the  relative  merits  of  insuring  the  small  firm. 
As  a  result,  the  markets  are  quicker  to  decline  coverage  for 
certain  small  firms,  or  if  they  agree  to  write,  they  charge 
rates  based  on  conservative  judgment  which  allows  for  a 
margin  of  error  on  the  high  side.  Therefore,  we  have  the 
feeling   that   premiums   currently   charged   small  businesses 


V-2  0 


^ 


could  well   prove   to   be   excessive.   .   ." 
discussion  of  premium  differences  at  pp.  VI -24. 


See   also   the 


While  the  Insurance  Study  did  not  analyze  premium  increases, 
it  did  find  that  larger  firms  had  larger  rate  increases.  This  is 
not  necessarily  inconsistent  with  the  Industry  Study  findings, 
for,  as  the  Insurance  Study  noted: 

".  .  .on  an  overall  basis,  rate  increases  were 
substantially  greater  for  large  companies  than  for  small, 
this  analysis  is  for  rate  increases ,  which  may  or  may  not  be 
indicative  of  upward  or  downward  changes  in  total  premium 
levels ,  as  the  final  premium  also  depends  on  changes  in 
exposures,  limits  of  liability,  application  of  experience. 


It  should  also  be  noted  that  in  the  Insurance  Study,  "large 
firms"  were  defined  as  those  with  over  $2.5  million  in  annual 
sales.  The  Insurance  Study  does  not  present  comparative  premium 
data  which  would  enable  comment  regarding  premium  levels  as 
opposed  to  rate  levels. 

There  is  some  indication  that  the  research  undertaken  by  the 
insurance  contractor  supports  the  NAIB  assertion  quoted  above, 
for  the  insurance  contractor  states: 

".  .  .It  is  usually  possible  for  the  policyholder  with 
more  than  $1 0  million  sales  (underscoring  added)  to  retain 
essential  coverage  by  making  some  adaptation-e .g .  assume  a 
large  deductible,  accepting  a  retrospective  rating  plan.  For 
the  smaller  firm,  particularly  the  single-product  firm,  these 
adaptations  are  not  as  feasible.  The  account  is  not  large 
enough  for  its  own  experience  to  have  credibility  for  the 
insurer,  and  it  does  not  have  the  financial  resources  to 
share   a   significant  proportion  of  the  risk  burden  itself. 

^f  C-  \J 


It  thus  appears  that  small  firms,  at  least  in  the  nine 
industries  surveyed,  are  treated  differently  from  large  firms  by 
liability  insurers,  and  this  could  have  a  significant  adverse 
impact  on  both  small  firms   and   the   users   of   their   products. 


V-21 


Table   V-1 1   presents  a  summary  of  the  experience  reported  by  the 

industry  contractor. 

The  questionnaire  sent  by  the  House  Small  Business 
Subcommittee  to  major  insurers  asked  whether  the  size  of  the 
insured  company  was  a  factor  in  the  rating  process  and  the 
company's  willingness  to  insure.  (Q.20).  One  firm  (Crum  & 
Forster)  indicated  a  tendency  to  concentrate  on  smaller  and 
middle-size  risks,  and  to  avoid  products  coverage  for  larger 
insureds.  The  other  respondents  indicated  size  could  be  a  factor 
and  noted  the  following: 

".  .  .Size  is  not  necessarily  a  primary  factor.  It  is 
the  product  per  se  as  well  as  the  performance  of  the 
manufacturer  which  are  the  governing  factors  in  risk 
selection  as  well  as  the  ability  to  obtain  an  adequate 
premium  for  the  exposure."   Continental 

".  .  .The  size  of  the  insured  company  is  an  important 
consideration,  especially  on  inherently  hazardous  products. 
If  there  is  a  chance  of  catastrophic  loss,  the  larger  insured 
company  will  very  likely  generate  a  premium  commensurate  with 
the  risk,  but  a  small  company  will  not."   The  Hartford  Group 

".  .  .Because  many  larger  companies  have  the  ability  and 
willingness  to  pay  the  expense  of  loss  prevention  facilities 
such  as  quality  control,  labeling,  packaging,  documentation, 
etc.  for  the  purpose  of  complying  with  insurance 
underwriters'  recommendations,  the  ability  of  a  larger 
company  to  obtain  products  liability  insurance  is  often 
enhanced.  However,  we  are  not  unwilling  to  write  small 
companies  solely  because  of  their  size."   St.  Paul 

".  .  .The  size  of  the  account  is  a  factor  in  the  rating 
and  risk  selection  process  in  several  respects.  The  size  of 
the  account  determines  whether  the  premium  level  will  permit 
the  account  to  qualify  for  the  application  of  certain  filed 
rating  plans--such  as  experience  and  schedule  rating, 
retrospective  rating,  composite  rating,  loss^  rating,  etc. 
The  size  of  the  account  also  determines  the  amount  of 
consideration  which  the  underwriter  might  give  to  the 
individual   characteristics  of  the  account  as  compared  to  the 


V-22 


average  accjounjb_^  Financial  abij^ity,  management  co^ntinuity  and 
expertise,  product  integrity_and  quality  contro_1.4.____the_  diversity 
and  changes  in  the  product  line,  cooperation  in  loss  control " and 
c raTm~^de f e n se  pr og r am s ,  and  individual  account  loss  experience 
become  moi^e_jnea5.ur-abie--a&— s-i^e--4^T^er-eas«^s .  These  factors  may  have 
either  a  positive  or  negative  impact  on  the  rating  and  selection 
process."   Aetna 

Certain  differences  in  premium  amounts  attributable  to  firm 
size  may  be  justifiable.  Serious  questions  of  public  policy 
arise,  however,  where  differences  in  the  treatment  of  large  and 
small  policyholders  cannot  be  justified  on  the  basis  of  expense 
or  loss  differences  between  them. 

Allocation  of  the  Product  Liability  Premium  Dollar 

An  important  issue  concerning  the  product  liability  system, 
including  the  insurance  industry  component  of  the  system,  is  the 
efficiency  with  which  it  operates.  A  measure  of  the  efficiency 
is  provided  by  the  way  in  which  the  premium  dollar  is  allocated. 
The  fraction  of  the  premium  dollar  that  is  actually  retained  by 
the  claimant  after  paying  legal  costs  is  one  indicator  of  the 
efficiency.  If  the  fraction  of  the  premium  dollar  retained  by 
the  successful  claimant  is  very  small,  one  of  the  principal 
purposes  of  the  system  is  defeated. 

■  For  the  product  liability  system  as  a  whole,  little 
information  is  available  to  determine  the  net  amount  paid  to 
claimants.  Neither  is  it  known  how  the  amounts  vary  by  type  of 
claim,  by  type  of  claimant,  or  how  the  amount  has  been  changing 
relative  to  other  allocated  amounts  of  the  premium  dollar. 

Insurers  generally  expect  premium  dollars  to  cover  losses  and 
underwriting  expenses  in  order  to  provide  a  satisfactory  return 
on  the  capital  employed.  Losses  include  both  the  actual  payments 
made  to  settle  claims  and  the  expenses  incurred  in  claims 
investigation,  legal  defense,  and  the  settlement  process.  These 
expenses  are  called  loss  adjustment  expenses.  Underwriting 
expenses  include  the  salaries  of  underwriters,  overhead 
allocations,  State  premium  taxes,  bureau  and  board  fees,  and 
commissions  for  agents  and  brokers. 


V-23 


The  following  tables  indicate  estimates  of  the  allocation  of 
the  product  liability  premium  dollar.  Table  V-12  presents  the 
estimate  developed  by  the  Insurance  Contractor  and  presented  in  a 
letter  dated  July  1,  1977,  to  the  Subcommittee  on  Capital 
Investment  and  Business  Opportunities,  House  Committee  on  Small 
Business  . 


Table   V-1 3   presents   estimates   developed 
Insurance  Administration. 


by   the   Federal 


The   assumptions  used  in  developing  the  estimates  in  Table  V- 
13  and  the  results  are   described   by   a   spokesman   for   FIA   as 

follows : 

".  .  .Based  upon  the  $5.2  billion  [includes  medical 
malpractice  insurance]  premiums  for  miscellaneous  liability 
in  1976,  it  is  possible  to  make  a  rough  approximation  of  the 
ultimate  distribution  of  those  premium  dollars  in  terms  of 
products  liability. 

Accepting  ISO's  estimate  that  about  40%  of  miscellaneous 
liability  represents  products  liability,  about  $2.08  billion 
will  be  allocable  to  the  latter. 

In  the  first  of  the  two  tables  printed  below,  a 
permissible  loss  and  loss  adjustment  ratio  of  60%  is  assumed 
which  means  that  if  loss  and  loss  adjustment  expenses  exceed 
60%  of  the  premiums  earned,  underwriting  profit  will  be 
reduced  or  eliminated.  Although  ISO  has  used  a  permissible 
loss  and  loss  adjustment  ratio  of  57.1%  in  its  filings  for 
products  liabilaity  manual  rates,  it  is  assumed,  here,  that 
underwriting  expenses  and  profit  will  constitute  about  40%  of 
the  premium  dollar.  The  second  table,  however,  assumes  a  70% 
permissible  loss  and  loss  adjustment  expense  ratio  and  an 
underwriting  expense  and  profit  component  of  30%. 

Under  the  first  table,  after  deducting  the  40%  for 
expenses  and  profit  from  the  $2.08  billion  of  premiums  that 
will  ultimately  be  earned,  there  is  left  about  $1.25  billion 
for  loss  and  loss  adjustment  expense. 


V-24 


According  to  the  Insurance  Study,  about  20  percent  of 
the  premium  dollars  go  to  loss  adjustment  expense,  or  $416 
million.  In  its  closed  claim  study,  ISO  has  estimated  that 
about  85%  of  loss  adjustment  expense  is  expended  for  defense 
legal  costs,  or  $354  million  in  terms  of  this  exercise. 

Of  the  $834  million  left  for  claimants  and  their 
attorneys,  under  Table  I,  it  would  appear  to  be  a  reasonable 
assumption  that  30%  thereof,  or  $250  million  will  go  for 
claimants'  attorneys'  fees  and  other  claimants'  legal  expenses. 
Under  Table  II,  $312  million  would  go  for  this  purpose." 

Under  Table  I  there  is  left  $584  million  for  claimants' 
compensation.  It  would  thus  appear  that,  under  this  table, 
claimants'  and  defense  lawyers  and  adjusters  will  derive 
considerably  more  compensation  from  the  system  than  accident 
victims  (666  million  compared  to  $584  million)  and  that 
claimant  and  defense  legal  costs,  alone,  will  exceed 
compensation  received  by  accident  victims." 

Under  Table  II,  combined  claimant  and  defense  legal 
costs  are  a  bit  less  than  the  compensation  received  by 
accident  victims  ($666  million  compared  to  $728  million)  but 
the  combined  legal  costs  and  other  loss  adjustment  expense 
almost  exactly  equals  the  compensation  to  be  received 
ultimately  by  accident  victims  ($728  million  compared  to  $728 
mill  ion)  ." 

System  costs  of  this  magnitude  have  prompted  calls  for  reform 
that  are  alleged  to  reduce  transaction  costs  inherent  in  the  tort 
litigation  system.   See  pp.  VII-279. 

PRODUCT  LIABILITY  UNDERWRITING  AND 
CLAIMS  EXPERIENCE 

Introduction 

This  section  reviews  the  data  currently  available  on 
aggregate  product  liability  underwriting  and  claims  experience. 
The  source  of  these  data  is  the  Insurance  Services  Office  (ISO). 
The  underwriting  figures  were  developed  by  ISO  on  the  basis  of 
reports   filed   pursuant   to  the  ISO  Statistical  Plan.   The  claim 


V-25 


data  consist  of  the  preliminary  results  of  the  ISO   Closed 
Survey . 


Claim 


Underwriting  Experience  Data 

ISO   monoline   data   on   reported   and  estimated  premiums  and 

losses  through  197^  represent  less  than  40%  to  50%   of   the   total 

product   liability   premium   written   by  the  industry  and  are  not 

necessarily   representative   of   the   total    product    liability 

underwriting    experience.     The   underwriting   data   which   are 

presented  in  this   section   are   based   on   reports   on   monoline 

22 
policies  by  all  companies  reporting  to  ISO. 


One  quarter  of  the  monoline  premium  is  attributable  to  manual 
rated  monoline  policies  and  the  remaining  three-quarters  is 
attributable  to  small  (a)  rated  policies.  Tables  V-14  through  V- 
17  are  based  on  monoline  data. 

Table  V-14  presents  the  aggregate  premium  collected  annually 
for  this  group  of  policies  and  the  incurred  losses  estimated  to 
be  attributable  to  these  policies.  Incurred  losses  included  paid 
claims,  estimated  costs  of  known  claims,  and  estimated  costs  of 
potential  claims  (IBNR)  as  well  as  estimated  expenses.  Table  V- 
15  through  V-17  show  the  breakout  of  incurred-but-not-reported 
(IBNR)  losses  by  bodily  injury  and  property  damage  combined,  and 
by  bodily  injury  and  property  damage  separately. 

The  loss-  figures  reported  in  each  of  the  tables  should  be 
clearly  understood.  They  do  not  represent  only  claims  paid 
during  the  years  reported,  but  rather,  they  represent  calculated 
estimates  of  what  amounts  ISO  projects  may  ultimately  be  spent 
for  each  policy  year  for  both  payments  to  claimants  and  loss 
adjustment  expenses.  The  loss  figures  were  calculated  by  ISO  by 
applying  a  loss  development  factor  to  the  incurred  loss  figures 
submitted  by  the  reporting  companies.  This  is  done  in  the 
following  fashion.  Insurers  submit  five  reports  on  losses  for 
each  policy  year.  The  first  report,  which  includes  paid  claims, 
reserves  for  known  claims  and  loss  adjustment  expenses,  but  does 
not  include  IBNR  estimates,  is  made  27  months  after  the  beginning 
of  the  policy  year  for  which  the  report  relates.  Four  subsequent 
reports   are   made   annually.    A   loss   development   factor    is 


V-26 


determined  by  comparing  the  average  changes  between  first  reports 
and  subsequent  loss  reports  in  the  three  most  recent  policy  years 
for  which  data  were  reported.  Similar  procedures  are  used  to 
determine  the  estimates  for  subsequent  reports.  The  factor 
currently  used  to  develop  incurred  losses  from  the  first  report 
to  the  fifth  report  is  1.876.  A  factor  of  1.02  is  applied  to  the 
fifth  report. 

The  loss  figures  reported,  particularly  those  for  the  most 
recent  years,  may  deviate  significantly  from  the  actual  losses. 
Of  course,  the  actual  losses  for  1973  and  197^,  for  example,  are 
not  likely  to  be  known  with  much  certainty  until  1978  and  1979- 
It  is  possible,  however,  that  the  1973  and  197^  loss  estimates 
may  overly  compensate  for  the  apparent  underestimation  of  losses 
in  the  early  seventies.  During  this  earlier  period  significant 
upward  revisions  were  made  to  the  early  loss  estimates.  The 
causes  of  the  earlier  underestimation  have  not  been  determined 
definitively,  although  alternative  explanations  have  been 
advanced . 

Whatever  the  cause,  there  is  no  doubt  that  abrupt  upward 
revisions  were  made.  These  changes  would,  of  course,  be 
reflected  in  the  loss  development  factor  used  by  ISO  and  its 
member  companies.  Such  a  reflection  would  be  appropriate  if  the 
changes  were  indicative  of  a  new  loss  trend.  If,  however,  it 
reflects  a  singular  "catch-up"  reaction  by  insurers,  a  new  trend 
may  not,  in  fact,  exist.  Similarly,  given  the  experience  of  the 
early  seventies,  it  is  reasonable  to  assume  that  the  insurers,  in 
their  own  estimates  of  potential  losses,  are  acting  very 
conservatively  in  order  to  avoid  underestimating  losses.  If  such 
is  the  case,  the  ultimate  projections  may  reflect  a  redundant 
overestimation ;  i.e.,  the  overestimation  existing  in  the  incurred 
losses  reported  to  ISO,  multiplied  by  a  loss  development  factor 
which  may  also  overestimate  expected  losses.  It  is  also  possible 
that  the  converse  situation  may  be  true.  Until  a  system  is  fully 
developed  which  permits  better  evaluation  of  actual  claims  and 
their  trends,  it  will  be  difficult  to  make  predictions  with 
precision.  In  the  absence  of  better  information,  it  is  probable 
that  conservative  assessments  of  potential  losses  will  continue 
in  at  least  the  near  term. 


V-27 


In  the  tables  V-1M  through  V-17,  the  estimates  indicate  that 
ISO  expects  losses  to  ultimately  exceed  collected  premium  for 
both  1973  and,  to  a  far  greater  extent,  197^. 


The   issue   of  whether   or   not   the   estimated   losses   are 

overstated  or  understated  is   critical   to   an   analysis   of   the 

product   liability   situation   since  the  loss  figures  are  used  in 

the  calculation  of  the  loss-and-loss-ad justment  ratio  from   which 

ISO   evaluates   the  need  for  manual  rate  increases.   The  ratio  is 

calculated  by  applying  a  "loss  trend"   factor   to   the   estimated 

losses  and  dividing  by  the  earned  premiums  at  current  rate  levels 

adjusted  by  the  "exposure  offset"  factor.   For   the   policy   year 

ending   December   31,   1973,   the   trend  factor  was  1.753  and  the 

exposure  offset  factor  1.17^.   These  factors   would   be   used   to 

23 
determine  rates  for  policies  written  in  January  1976 

The  resulting  loss-and-loss-ad justment  ratio  is  compared  with 
the  expected  loss  ratio.  The  expected  loss  ratio  is  currently 
0.571.  The  expected  loss  ratio  represents  an  estimate  of  the 
percentage  of  premiums  at  present  manual  rates  that  is  required 
to  pay  claims.  ISO  estimates  that  37.9%  of  the  premium  is 
required  for  underwriting  expenses  plus  5%  for  profit  and 
contingencies.  Thus  they  suggest  that  no  more  than  57.1%  of  the 
premium  dollar  should  go  for  losses.  The  loss-and-loss- 
adjustment  ratio  is  divided  by  the  expected  loss  ratio.  The 
result  is  the  indicated  rate  level  increase. 

It  is  apparent  from  the  above  that  the  primary  determinants 
of  rate  increases  are  estimates  of  expected  losses  and  changes 
therein.  In  Table  V-14  the  ratio  given  for  1973  is  1.107.  The 
ratio  for  197^  is  1.474.  These  ratios  would  suggest  that  further 
manual  rate  increases  may  be  anticipated.  Since  the  figures 
include  small  (a)  rates  as  well,  these  might  be  expected  to  also 
be  increased.  If  the  expected  loss  ratio  of  0.571  and  the  1974 
loss-and-loss-ad justment  ratio  of  1.474  were  used  as  determinants 
of  the  necessary  1977  premium  rates,  those  rates  would  be  258%  of 
the  1974  rates. 


V-28 


Claims  Experience 


Introduction 


Until  recently  no  aggregate  data  on  product  liability  claims 
have  been  available.  Although  commentators  have  suggested  that 
there  have  been  "dramatic  increases"  in  the  number  and  cost  of 
product  liability  claims,  no  direct  evidence  has  been  available 
to  either  support  or  refute  the  contention.  In  1976  the 
Insurance  Services  Office,  with  the  cooperation  of  its  member  and 
subscribing  companies,  sought  to  remedy  this  lack  of  data  and 
undertook  a  major  closed  claim  survey  which  sought  to  collect 
data  on  all  product  liability  claims  closed  between  July  1,  1976 
and  March  15,  1977.  The  final  results  of  this  survey,  which  are 
not  yet  available,  should  be  of  real  value  to  insurers  and  others 
interested  in  product  liability.  This  section  focuses  on  the 
preliminary  report  of  the  survey  which  was  published  in  December 
1976. 

The  Preliminary  Report  on  the  ISO 
Closed  Claim  Survey 


The   preliminary   analysis 
jrus—CLLosed  and  reported   to 


was   based  on  approximately  7,800 
_  ISO   between   July   1,   1976   and 

November  1,  1976.  The  results  are  useful  to  the  extent  that  they 
give  some  indications  of  the  type  of  data  which  may  be 
anticipated  in  the  final  report,  but  they  are  not  necessarily 
representative  of  overall  claims  experience. 


Several  problems  are  apparent  in  the  preliminary  report  which 
will,  hopefully,  be  overcome  in  the  final  report.  These  problems 
include  the  following: 

Trend  ing .  ISO  chose  to  apply  a  trend  factor  to  certain  of 
the  payments  reported.  Although  ISO  has  made  both  trended  and 
untrended  data  available,  its  analysis  of  the  preliminary  results 
relies  on  the  trended  data.  Briefly  stated,  ISO's  method  of 
trending  is  to  translate  the  incident  data  of  each  closed  claim 
to  July  1,  1976  and  multiply  all  cost  data  on  each  claim  by  a 
selected  annual  factor.  The  effect  of  the  trending  is  to  adjust 
the  costs  so  as  to  estimate  what  each  claim  might  cost  if  it 
occurred   in   July   1976   and   was  closed  sometime  in  the  future. 


V-29 


Thus ,  a  claim  which  had  a  six-year  lag  between  occurrence  and 
closing  would  be  adjusted  so  that  the  trended  cost  would  reflect 
ISO's  estimate  of  what  it  would  cost  if  closed  in  1984. 

In  a  review  of  ISO's  trending,  Howard  B.  Clark  of  the  Federal 
Insurance  Administration  observed: 

".  .  .Inasmuch  as  the  normal  function  of  trending  is 
ratemaking,  which  is  clearly  not  the  purpose  of  the  closed 
claims  study,  there  are  those  who  will  question  the  wisdom  or 
propriety  of  trending  incident  to  this  exercise.  .  ." 

In  explaining  its  use  of  trended  data,  ISO  has  said: 
"This  allows  us  to  examine  what  would  happen  if  all  incidents 
in  the  survey  occurred  in  the  same  year."  Since,  manifestly, 
the  incidents  surveyed  did  not  all  occur  in  the  same  year, 
the  purpose  of  the  exercise  remains  obscure.  Moreover,  ISO 
has  warned  that:  "The  nature  of  a  closed  claim  survey  is 
such  that  it  provides  a  truly  accurate  picture  of  only  the 
past  environment"  (p.  12  Closed  Claim  Survey).  In  addition, 
ISO  has  cautioned:  "It  is  possible  that  an  incident  from  1965 
would  not  have  occurred  in  1976  due  to  changes  in  the  legal 
environment,  social  attitudes,  business  expectations, 
government,  etc.  Conversely,  many  of  the  kinds  of  incidents 
which  are  generating  claims  today  may  not  have  occurred  or 
generated  claims  several  years  ago."  In  the  light  of  these 
cogent  ISO  caveats,  it  is  difficult  to  descry  either  the 
purpose  or  the  worth  of  the  trended  data   ." 

When  completed,  the  ISO  Closed  Claim  Survey  should  provide  a 
description  of  the  claims  closed  during  the  period  for  which  the 
data  were  collected  from  the  participating  companies.  The 
untrended  data  will  describe  the  distributions  of  claims  by 
product  classes,  types  of  claims,  status  of  injured  parties, 
sizes  of  payments,  etc.  for  those  claims  actually  closed.  Use  of 
the  trended  data  to  describe  such  distributions  would  be 
inappropriate . 

Representativeness  of  the  ISO  Sample . --Whether  or  not  the 
underwriting  practices  and  claims  settlement  procedures  of  the 
twenty-three  participating  insurance  firms  are  representative  of 
those  of  the  industry  as  a  whole  is  not  known.   It   is   also   not 


V-30 


known  what  fraction  of  the  total  product  liability  premium  was 
written  by  the  twenty-three  during  the  period  when  the  closed 
claims  were  initiated,  nor  is  it  known  what  fraction  of  the  total 
losses  incurred  was  incurred  by  them  during  the  period.  These 
unknowns  severely  limit  the  statistical  reliability  of  the  data 
and  the  validity  of  generalizations  which  can  be  drawn  from  them. 

The  results  presented  in  the  Preliminary  Report  have  two 
further  deficiencies  as  indicated  by  the  following  statements  in 
that  report: 

".  .  .the  number  of  forms  available  at  this  point  does 
not  provide  a  sufficiently  large  base  to  yield  a  truly 
representative  picture  of  claims  closing  today.  .  ." 

".   .  .one  participating  company  opted  to  complete  forms 

for  all  product  claims  in  July,  but  for  claims   closed   after 

July   31 ,   only   those   which   received   payment  greater  than 

$1,000  were  submitted  to  ISO.   In  this   preliminary   analysis 

that   company   has   been   included  in  all  reports.   It  is  our 

intention  to  run  future  reports  both  with   and   without   that 

25 
company's  data.  .  ." 

The  preliminary  results  reported  by  ISO  in  its  December 
report  attempt  to  give  indications  of  such  information  as: 

•  the  products  generating  the  most  payment  dollars 

•  the  status  of  injured  party  receiving  payment 

•  time  intervals  in  the  claims  process 

Tables  V-18  and  V-19  compare  the  trended  and  untrended 
results  of  data  processed  by  ISO  through  November  1976  for 
products  generating  the  most  payment  dollars  for  bodily  injury 
and  for  property  damage.  It  is  apparent  that  the  ISO  trending 
method  shifts  the  percentages  attributable  to  products  and  party 
status  and  inflates  the  amounts  of  payments  as  well.  In  Table  V- 
18  the  effect  of  trending  on  the  one  claim  paid  for  a  bodily 
injury  caused  by  a  "laundry  centrifugal  extractor"  is  to  increase 
the  actual  payment  of  $195,000  to  a  projected  payment  of 
$1,^5^,700.  In  the  same  table,  the  percentage  of  payments 
attributable  to  "chemicals"  was  changed  from  an  actual  1.9  to  5.6 
by  the  trending. 


V-31 


Table  V-20  shows  the  time  distributions  involved  between  the 
occurrence  and  the  reporting  of  the  claims.  Table  V-21  indicates 
the  time  distributions  between  the  occurrence  and  the  closing  of 
the  claims. 

Table  V-22  compares  the  trended  and  untrended  results  of  the 
preliminary  processing  by  ISO  on  the  distribution  of  product 
liability  claims  by  the  status  of  the  injured  party  in  the 
occurrence  resulting  in  the  claim.  ISO's  trending  of  the  data 
increases  the  percent  of  total  payment  and  inflates  significantly 
the  average  of  non-zero  payments  for  both  bodily  injury  and 
property  damage  attributable  to  those  whose  status  is  "non- 
purchaser,  user  or  consumer." 

Table  V-23  indicates  the  distribution  of  claims  closed  at 
various  stages  of  the  legal  system.  The  payment  averages  are  for 
all  non-zero  payments.  For  example,  of  the  165  bodily  injury 
claims  which  ISO  reports  as  going  to  a  court  verdict  only  39  were 
awarded  payment.  If  the  total  amount  attributable  to  court 
verdicts  were  divided  by  the  number  of  claimants  who  obtained 
payment  as  well  as  those  who  didn't,  the  average  cost  per  claim 
of  claims  going  to  a  court  verdict  would  be  $11,473  in  payment 
and  $7,441  in  allocated  loss  adjustment  expense,  a  total  of 
$18,914  per  claim.  If  the  same  calculations  were  performed  on 
the  40  claims  for  which  settlement  was  reached  during  trial  but 
before  a  court  verdict,  the  figures  would  be  $29,665  average 
payment  plus  $12,136  for  a  total  of  $41,801  or  2.2  times  the 
average  cost  of  those  obtained  from  a  verdict. 

The   foregoing   discussion  and  tables  have  been  presented  for 

illustrative  purposes.   It  should  be  noted  that   while   the   data 

presented  may  be  representative  of  the  experience  of  23  companies 

during  the  reporting  period,  there  is  considerable  question  about 

whether   they   represent  more  than  these  companies.   As  was  noted 
26 


earl ier 


one   company,   Liberty   Mutual,   submitted    complete 


reports  for  only  one  month  after  which  they  submitted  only  paid 
claims  closed  with  payments  in  excess  over  $1,000  dollars 
Table  V-24  indicates  the  total  number  of  bodily  injury  claims 
paid  by  Liberty  Mutual  in  1976.  The  average  payment  is  stated  to 
be  $2,105.  Given  the  large  volume  of  claims  handled  by  this 
company  in  the  $1,000  to  $5,000  payment  range,  it  is  reasonable 
to   assume   that   the  inclusion  of  these  claims  in  the  ISO  Closed 


V-32 


Claim  Study  might  have  significantly  affected  the  results.  It 
should  also  be  noted  that  the  table  includes  only  the  number  of 
paid  claims  leading  one  to  infer  that  there  must  be  a  significant 
number  of  claims  for  which  payment  was  not  made  which  were  also 
excluded  from  the  Closed  Claim  Survey. 

Conclusion 


Several  conclusions  can  be  drawn  from  the  preceding 
discussion.  As  regards  the  underwriting  data  presented  two 
general  comments  apply.  First,  insofar  as  the  aggregate  product 
liability  premium  is  unknown,  it  seems  appropriate  that  means  of 
obtaining  these  data  be  explored.  One  means  to  accomplish  this 
would  be  to  require  that  product  liability  experience  be  broken 
out  and  reported  as  a  separate  item  on  the  financial  reports 
filed  annually  with  Insurance  Commissioners.  The  second  comment 
relates  to  the  manner  in  which  losses  are  estimated  and  rate 
increases  are  projected.  The  current  methodology  is  imprecise 
and  may  be  subject  to  significant  error.  The  primary  means  which 
could  be  utilized  to  correct  these  deficiencies  would  be  the 
annual  collection  of  data  on  all  product  claims.  The  Closed 
Claim  Survey  conducted  by  ISO  clearly  demonstrates  that  the  data 
can  be  collected.  If  the  deficiencies  in  the  existing  survey 
could  be  overcome,  primarily  by  encouraging  or  mandating  all 
companies  to  submit  data  on  all  claims,  and  if  the  survey  were 
done  on  a  continuous  basis,  the  examination  of  changes  in 
untrended  data  would  provide  a  strong  basis  for  future  decisions 
by  insurers  and  their  regulators. 

THE  FINANCIAL  SITUATION  IN  THE  PROPERTY-CASUALTY 
INSURANCE  INDUSTRY 

Introduction 

This  section  attempts  to  determine  how  the  financial 
condition  of  product  liability  insurers  in  the  past  several  years 
has  influenced  the  rate  at  which  premiums  have  risen.  To  do 
this,  it  would  be  appropriate  to  examine  the  financial  indicators 
of  product  liability  insurance  as  a  separate  line  as  well  as 
indicators  for  broader  categories  of  insurance  which  include 
product  liability  insurance.  This  would  permit  comparisons  with 
other  lines  within  the  broader  categories  and  would  allow   direct 


V-33 


inferences  concerning  product  liability  premiums.  However,  since 
product  liability  experience  is  not  reported  separately,  only  the 
overall  results  for  the  property-casualty  insurance  industry  and 
the  financial  indicators  for  miscellaneous  liability  insurance,  a 
line  of  the  property-casualty  insurance  industry  that  includes 
product  liability  insurance,  are  analyzed. 

The  financial  data  analyzed  are  those  reported  by  the 
insurance  companies  and  the  insurance  trade  press.  Among  the 
sources  used  are  the  Annual  Reports  filed  with  the  District  of 
Columbia  Insurance  Department  by  the  top  10  writers  for 
miscellaneous  liability  insurance  (on  the  basis  of  total  premiums 
written).  The  primary  indicators  used  in  this  discussion  are 
the  "combined  loss  and  expense  ratio"  and  the  "premium  to  surplus 
ratio."  The  former  is  considered  indicative  of  the  relative 
underwriting  profit  or  loss.  The  latter  is  considered  indicative 
of  capacity,  that  is,  the  ability  to  underwrite  additional  risks. 
Because  of  insurance  accounting  conventions,  and  the  fact  that 
certain  of  the  amounts  reported  as  losses  are  estimates,  these 
ratios  may  not  reflect  the  actual  financial  situation.  They  are 
useful,  however,  to  identify  relative  changes  from  year  to  year, 
and  as  indicators  of  the  perceptions  of  carriers  regarding  their 
standing  in  the  industry. 

Reserving  practices  affect  both  financial  indicators  and 
premium  levels.  They  are  reviewed  prior  to  the  discussion  of  the 
financial  indicators  and  their  implications  for  products 
liabil ity . 

Reserving  Practices 


Amounts   set 
ponent  of  what  i 
recent   policy 
reserves  for  cla 
amount   of   repo 
financial  indica 
V-26.    It   is 
represent  actual 
expected   claim 
the  amount  repor 


aside  in  loss  reserves  constitute  a  major  com- 
s  reported  as  "incurred  losses"  for  the  most 
year.  (Incurred  losses  include  claims  paid, 
ims  and  loss  adjustment  expenses.)  The  total 
rted  "incurred  losses"  significantly  affects  the 
tors,  as  well  as  premium  rates  as  was  noted  on  p. 
important   to   note   that   loss   reserves   do  not 

expenditures,   but   rather,   are   estimates   of 

costs  for  the  period.   Thus,  the  relationship  of 

ted  as  "incurred  losses"   to   ultimate   costs   is 


V-3^ 


only   as   good   as   the 
reserving  practices. 


estimates   of   these  costs;  that  is,  the 


As  discussed  earlier,  two  categories  of  loss  reserves  exist; 
those  which  are  established  to  cover  the  cost  of  known  claims, 
and  those  established  to  cover  the  cost  of  potential  claims;  the 
incurred-but-not-reported  (IBNR)  claims. 

The  Task  Force  staff  analyzed  the  incurred  losses  of  the  10 
leading  insurance  companies  writing  miscellaneous  liability 
insurance.  For  these  companies,  incurred-but-not-reported  losses 
were  39.2%  of  total  incurred  losses  for  miscellaneous  liability 
in  1975  and  42.1%  in  1976.  IBNR  loss  percentages  for  the 
individual  companies  ranged  from  16.1%  and  26.2%  for  the  two 
lowest  to  51.0%  and  55.8%  for  the  two  highest  in  1975.  The  1976 
range  was  from  19.5%  and  34.8%  for  the  two  lowest  to  50.8%  for 
the  two  highest.  Incurred-but-not-reported  losses  were  not 
broken  out  separately  on  the  Annual  Statements  until  1975. 
Whether  the  product  liability  portion  of  the  miscellaneous 
liability  line  for  these  companies  exhibit  a  higher  or  lower 
incurred-but-not-reported  fraction  in  1975  and  1976  than  the 
whole  line  is  unknown. 

The  primary  insight  that  can  be  gained  from  the  analysis  is 
provided  by  examining  annual  changes  made  in  estimates  for 
incurred  losses  for  a  given  year.  In  general,  the  estimates  were 
revised  upward  through  1976.  Table  V-25  indicates  the  annual 
changes  made  in  incurred  loss  estimates  by  the  10  companies 
between  1972  and  1976.  These  changes  are  necessitated  because 
incurred  losses,  including  incurred-but-not-reported  losses,  for 
any  given  year  are  estimates.  As  the  loss  experience  for  a  given 
year  "matures"  in  subsequent  years,  losses  become  known  with  more 
precision.  In  the  1976  annual  statements,  revisions  of  incurred 
loss  estimates  through  1976  are  given  for  the  earlier  years  in 
which  losses  were  incurred. 

It  is  apparent  from  the  data  that  reported  total  incurred 
losses  in  the  miscellaneous  line  have  increased  significantly 
over  the  past  few  years.  While  these  increases  have  resulted  in 
underwriting  losses  and  have  led  to  increased  premiums,  it  is  not 
possible  to  determine  the  overall  percent  attributable  to  product 
liability.   Nor  is  it  possible  to   determine   whether   the   total 


V-35 


incurred  losses  are  overestimated  or  underestimated  as  a  result 
of  reserving  practices  which  may  be  based  on  inaccurate  estimates 
of  the  numbers  and  costs  of  individual  claims.  Insofar  as 
companies  employ  differing  reserving  practices  and  insofar  as 
estimating  reserves  (particularly  IBNR)  is  an  imprecise  art 
which,  at  least  for  product  liability,  lacks  a  good  data  base,  it 
is  reasonable  to  assume  that  the  amounts  reported  as  total 
incurred  losses  are  imprecise. 

Unresolved  Issues  in  Reserving  Practices 

The  precise  impact  of  reserves  for  incurred  losses,  including 
incurred-but-not-reported  (IBNR)  losses,  on  product  liability 
underwriting  losses,  rates,  and  the  determination  of  the 
profitability  of  the  line  is  still  unresolved. 

Similarly,  the  Task  Force  staff  has  not  been  able  to  directly 
address  the  issue  of  whether  or  not  the  unpredictability  inherent 
in  the  reparations  and  insurance  system  lends  itself  to  a 
continuing  redundancy  in  the  reserves.  The  entire  area  of 
reserving  practices  is  one  that  has  been  the  subject  of 
considerable  debate  which  appears  certain  to  continue.  It  is  an 
area  in  which  there  is  a  vital  need  for  more  objective  study. 

Overall  Property-Casualty  Experience 

Property-casualty  insurance  includes  miscellaneous  liability, 
workers'  compensation,  automobile  and  other  lines.  Miscellaneous 
liability  premiums  in  1976  represented  $5.2  billion  of  the  $59.5 
billion  property-casualty  premium. 

One  of  the  reported  reasons  for  the  difficulty  in  obtaining 
product  liability  insurance  is  the  lack  of  capacity  for  writing 
new  business  in  the  property-casualty  insurance  industry.  One 
measure  of  capacity  used  by  insurers  is  the  written  premium-to- 
pol  icyholder-sur  pi  us  ratio.  When  this  ratio  is  high,  insurance 
companies  become  more  conservative  in  selecting  the  risks  they 
will  insure.  Product  liability  is  one  of  the  lines  where  risks 
(exposures)  are  believed  to  be  bigh  and  companies  are  selective 
in  writing  additional  accounts. 


V-36 


Policyholder  surplus  is  the  amount  remaining  after  all 
liabilities  are  deducted  from  assets  and  includes  such  sums  as 
paid-in-capital  and  special  voluntary  reserves. 

The  rationale  behind  the  premium-to-surplus  measure  is  as 
follows:  Policyholder  surplus  is  viewed  as  a  contingent  reserve 
which  could  be  used  to  cover  unanticipated  losses.  Premiums  are 
viewed  as  a  surrogate  for  exposure  and  therefore  potential 
liabilities.  If  premiums  overstate  or  understate  this  exposure, 
actual  capacity  will  be  misrepresented. 

The  aggregate  premium  to  policyholder  surplus  ratio  for  the 
property  casualty  insurance  industry  increased  sharply  between 
1973  and  1974  and  remained  essentially  constant  at  the  high  level 
in  1974,  1975  and  1976.  It  should  be  noted  that  an  increase  in 
premium  rates  will  itself  decrease  insurance  capacity  for  the 
short  term.  The  reason  for  this  is  twofold.  First,  the  rate 
increase  raises  the  premiums-written  portion  of  the  ratio. 
Additionally,  the  immediate  effect  will  be  to  increase  the 
insurers'  unearned  premium  reserve  liability  (in  insurance 
accounting  this  is  an  actual,  not  contingent  liability)  thus 
impacting  the  policyholder  surplus  portion  of  the  ratio. 

The   premium-to-surplus   ratios   shown   below   are   based  on 

information  gathered  from  the  Insurance  Information  Institute  and 

A.M.    Best   Company.    The   premium-to-surplus   ratios   for  the 

property-casualty  insurance  industry  from  1971   to   1976   are  as 
follows : 


1971 
1972 
1973 


1.83-to-1 
1.65-to-1 
1.96-to-1 


1974: 

2.76-to-1 

1975: 

2.53-to-1 

1976: 

2.57-to-1 

Other  indicators  of  the  financial  condition  of  the  overall 
property-casualty  insurance  industry  are  to  be  found  in  Table  V- 
26  which  summarizes  estimates  of  the  financial  operating  results 
of  the  industry. 

The  industry  has  reported  substantial  statutory  underwriting 
losses  over  the  past  few  years.  Statutory  underwriting  losses 
were  $2.12  billion  in  1974,  $3.63  billion  in  1975  and  $1.67 
billion  in  1976.   As  noted  in   the   August   29,   1977,   Executive 


V-37 


Letter  of  the  Insurance  Information  Institute,  data  reported  to 
the  California  Insurance  Department  on  Fire,  Casualty  and  Allied 
Lines  indicate  an  underwriting  profit  of  $123  million  in  the  12 
months  preceding  June  30,  1977.  (The  reporting  companies  write 
about  90%  of  the  total  property-casualty  insurance  written 
nationwide.)  This  would  indicate  a  net  underwriting  profit  for 
the  property-casualty  insurance  in  industry  in  1977.  The 
statutory  underwriting  gain  (or  loss)  is  determined  by  the 
differences  between  earned  premium  and  the  sum  of  incurred  losses 
and  expenses  for  a  given  year.  As  noted  previously,  incurred 
losses  include  the  actual  costs  and  anticipated  costs  of  claims 
reported  as  well  as  the  costs  of  anticipated  incurred-but-not- 
reported  losses.  The  use  of  only  earned  premium  in  determining 
underwriting  losses  tends  to  underestimate  the  income  position, 
particularly  in  light  of  the  fact  that  the  prepaid  expenses 
referable  to  commissions  and  other  acquisition  costs  (and  which, 
therefore,  could  logically  be  amortized  over  the  policy  periods) 
are  chargeable  in  full  against  income  as  represented  by  earned 
premiums.  Although  this  may  well  afford  a  very  useful  "acid 
test"  for  gauging  the  solvency  or  solidity  of  insurers,  its 
utility  otherwise  is  questionable. 

The   combined-loss-and-expense-ratio   is   an  indicator  of  the 

relative  underwriting  profit  or  loss.   This  ratio   is   determined 

by   combining   the   loss   ratio   and  the  expense  ratio.   The  loss 

ratio  is  the  quotient  resulting  from  dividing  incurred  losses   by 

earned   premiums.    The   expense   ratio  is  the  quotient  resulting 

from  dividing  incurred   expenses   by   either   earned   or   written 
30  K        J 

premiums  .  A  combined  ratio  of  less  than  100  indicates  an 
underwriting  profit  whereas  a  combined  ratio  over  100  indicates 
an  underwriting  loss.  This  indicator  has  improved  substantially 
from  1975  to  1976,  dropping  from  107.9  to  102.8. 

Net  investment  gains  made  it  possible  for  the  industry  to 
have  net  income  of  $1.2  billion  in  1974,  $0.6  billion  in  1975  and 
$2.65  billion  in  1976.  However,  these  profits  were  substantially 
lower  than  in  the  previous  three  years. 

In  retrospect,  it  can  be  argued  that  the  underwriting  profits 
in  1971  and  1972  were  overstated.  Reserves  that  had  been 
initially  set  up  to  cover  claims  filed  prior  to  1973  were  later 
considered   to   be    inadequate.     Underwriting    results    were 


V-38 


considered  poor  in  1973  and  turned  into  reported  underwriting 
losses  in  197^.  Increased  competition  and  rate  cutting  appear  to 
have   been   factors  in  this  development,  as  well  as  the  high  rate 


of  inflation  and  some  extraordinary 

31 
occurred  during  this  period 


natural   catastrophes   which 


The  underwriting  losses  in  1975  can  be  attributed,  at  least 
in  part,  to  a  delayed  reaction  to  the  erosion  of  reserves 
established  in  prior  years.  According  to  Standard  &  Poor's 
Industry  Surveys,  if  it  had  not  been  necessary  for  many  companies 
to  bolster  their  reserves  for  unsettled  claims  carried  over  from 
prior  years,  a  turn  in  underwriting  margins  would  probably  have 
occurred  by  early  1975  .  The  improvement  in  underwriting  results 
noted  in  1976  may  be  attributed  both  to  the  improved  condition  of 
reserves  and  the  effects  of  rate  increases  in  late  1974  and  1975. 


Most  property-casualty  insurers  remained  profitable  during 
the  1971-76  period  in  spite  of  the  unsatisfactory  underwriting 
experience  during  the  latter  part  of  the  period.  This  condition 
is  attributable  to  investment  income  as  well  as  to  tax  credits  on 
the  underwriting  losses.  Investment  income  of  property-casualty 
companies  is  usually  the  primary  source  of  net  earnings.  Unlike 
life  insurance  where  a  large  portion  of  investment  income  is  paid 
out  in  policyholder  benefits,  investment  income  of  property- 
casualty  companies  is  carried  straight  to  earnings  .  In 
contrast  to  the  volatile  nature  of  underwriting  income, 
investment  income  has  grown  at  a  steady  rate  during  the  last  10 
years.  Between  1971  and  1975,  investment  income  of  stock 
property-casualty  companies  grew  from  $1.8  billion  to  $3.1 
billion  .  For  1976,  investment  income  is  expected  to  be  even 
higher  than  for  1975  when  all  the  reports  are  in. 


Miscellaneous  Liability  Experience 

Table  V-27  compares  aggregate  premium  for  the  total  property- 
casualty  industry  with  those  of  the  miscellaneous  line. 

Overall  miscellaneous  combined-loss  ratios  are  compared  with 
overall  property-casualty  underwriting  combined-loss  ratios  in 
Table  V-28.  The  miscellaneous  liability  data  are  taken  from 
Best's  Insurance  News  Digest,  Property/Casualty  Edition,   January 


V-39 


3,  1977.   Figures  for  1976  miscellaneous  experience  are  estimates 
made  by  A.  M.  Best. 

These  figures  indicate  that  miscellaneous  insurance  premium 
volume  has  more  than  doubled  since  1972.  However,  when  viewed  as 
a  percentage  of  aggregate  premium  for  the  industry,  its  share 
increased  only  from  6.4%  in  1972  to  8.7%  in  1976. 

The  combined  ratios  seem  to  indicate  that  statutory 
underwriting  losses  have  been  greater  within  the  miscellaneous 
line  than  in  the  total  industry.  On  the  other  hand,  it  would 
likewise  seem  that  the  investment  income  allocable  to  this  line, 
characterized  by  slow  pay-out  and  long-standing  reserves  should 
be  greater  than  for  lines  without  those  characteristics. 

The  substantial  improvement  in  the  combined  ratio  for 
miscellaneous  liability  in  1976  is  largely  due  to  large  increases 
in  aggregate  premiums.  Observation  of  the  loss  ratios  would 
indicate  that  the  underwriting  results  in  the  industry  are 
greatly  improved. 

The  overall  comparison  of  the  experience  of  the  10  leading 
companies  with  the  total  miscellaneous  liability  line  is  shown  in 
Table  V-29.  In  the  1972  to  1974  period,  the  loss  ratios  were 
worse  for  the  10  companies  than  for  the  total  line,  but  they 
showed  more  rapid  improvement  in  1975  and  1976.  For  the  10 
leading  companies,  the  ranges  of  loss  ratios  for  1972  through 
1976  are  given  in  Table  V-30.  It  appears  from  this  limited 
analysis  that  statements  concerning  statutory  underwriting 
experience  for  miscellaneous  liability  would  have  to  allow  for 
the  fact  that  such  experience  of  some  insurers  is  decidely  better 
than  of  others.  Moreover,  the  income  from  investments 
attributable  to  funds  supplied  by  policyholders  must  always  form 
a  backdrop  for  such  statements. 

The  Implications  of  the  Financial  Trends  for 
Product  Liability  Insurance  Costs 
and  Availability 

Although  the  overall  underwriting  results  have  shown 
significant  improvement  recently,  there  is  no  reason  to  believe 
that   the   situation  is  likely  to  improve  for  those  manufacturers 


V-4  0 


and  suppliers  who  have  been  unable  to  purchase  sufficient  product 
liability  insurance  or  who  have  been  affected  by  severe  premium 
increases.  To  the  extent  that  insurers  perceive  that  claims  for 
high  risk  products  were  major  contributing  factors  in  the 
underwriting  losses  recently  experienced,  it  seems  reasonable  to 
assume  that  they  would  prefer  to  emphasize  coverage  of  low  risk 
products.  Thus,  coverage  is  unlikely  to  be  available  widely  for 
the  small-  and  medium-size  manufacturers  of  a  single  product  that 
is  deemed  to  be  a  high  risk,  or  for  other  small  or  medium 
manufacturers  for  which  high  risk  products  are  most  of  the 
production.  For  those  manufacturers  who  produce  a  mix  of  some 
high  risk  products  but  a  larger  proportion  of  low  risk  products, 
coverage  will  probably  be  available  and  affordable.  This  is 
because  insurers  will  probably  be  willing  to  write  high  risk 
products  coverage  as  part  of  a  package  for  which  the  total 
premium  is  relatively  large.  Even  though  the  price  of  the  high 
risk  portion  of  the  coverage  may  be  high,  the  financial  impact  on 
the  insured  may  be  dampened  since  the  total  premium  as  a 
percentage  of  gross  sales  will  be  reduced  by  including  the  price 
of  coverage  for  low  risk  products. 

The  poor  financial  results  were  responsible  for  a  substantial 
part  of  the  subsequent  premium  increases.  However,  the  poor 
financial  results  could  have  been  due  to  over  estimations  of 
losses.  Whether  the  rates  were  too  low  or  the  loss  estimates  too 
high  will  not  be  known  definitively  for  some  time.  Based  on 
miscellaneous  liability  current  financial  results,  particularly 
for  those  companies  experiencing  high  loss  ratios,  it  is  likely 
that  premium^levels  for  product  liability  will  increase  in  The 
near  future.     ~        ~  "  " 

REINSURANCE  AND  SURPLUS  LINES  INSURANCE 

Introduction 

This  section  focuses  on  the  role  of  reinsurance  and  surplus 
lines  insurance  in  the  product  liability  market.  Insofar  as  both 
reinsurance  and  surplus  lines  are  essentially  unregulated,  it  is 
difficult,  if  not  impossible,  to  obtain  sufficient  data  to 
definitively  evaluate  their  capacity  to  provide  coverage; 
nonetheless,  this  section  attempts  to  identify  the  role   of   each 


V-^1 


and   the   impacts   they 
availability  and  cost. 


may   have  on  product  liability  insurance 


Surplus  Lines  Insurance 

Characteristics  of  Surplus  Lines  Insurance 
and  Coverage  Trends 

Surplus  lines  insurers  are,  by  definition,  those  insurers 
which  are  not  admitted  to  write  regular  insurance  business  in  the 
states  in  which  the  insurance  is  sold.  These  nonadmitted 
insurers  emerged  many  years  ago  as  a  supplement  to  the 
traditional  market.  Their  purpose  has  been  to  write  the  coverage 
and  limits  that  the  admitted  companies,  (companies  licensed  to  do 
business  in  the  policyholder's  state)  cannot  absorb.  These 
nonadmitted  insurers  have  also  gained  a  reputation  for  writing 
unique  and  unusual  forms  of  coverage.  However,  as  these 
coverages  become  better  known  and  the  loss  costs  become  more 
predictable,  admitted  insurers  tend  to  "take  over"  the  market  for 
these  coverages.  This  is  not  particularly  difficult  as  the 
surplus  lines  laws  that  regulate  the  affairs  of  nonadmitted 
insurers  generally  require  that  coverage  written  by  these 
insurers  first  be  refused  by  admitted  companies. 

Another  significant  characteristic  of  the  surplus  lines 
market  is  that  surplus  lines  insurers  are  often  prohibited  from 
charging  a  lower  rate  than  that  available  from  licensed  insurers. 
Thus,  coverage  available  from  these  companies  is  often  offered  at 
a  multiple  of  the  premium  charged  by  admitted  insurers.  Surplus 
lines  insurers  can  charge  these  higher  premiums  as  their 
policyholders  have  exposure  which  normally  cannot  be  absorbed  by 
admitted  insurers;  thus,  if  they  want  coverage,  they  must  pay  the 
premiums  the  surplus  lines  insurers  want. 


The   consequence   of  this   pricing  practice  is  that  business 
/flows  to  the  surplus  lines  markets  during   periods   when   primary 


■J 


insurers   are   cutting   back  their   writings  or  avoiding  certain 

classes  of  risks.   Thus,   in  1975,   the   surplus   lines  markets 

reportedly   absorbed   large  increments   of  medical   malpractice 
coverage 


V-42 


Table  V-31  shows  the  amount  of  all  lines  premium  written  by 
surplus  lines  companies  during  the  four-year  period  between  1972 
and  1975.  Premium  volume  increased  51%  between  197^  and  1975  to 
$612.8  million  following  increases  of  only  7.8%  between  1972  and 
1973  and  16.3%  between  1973  and  197^.  Premiums  are  further 
estimated  to  have  increased  substantially  between  1975  and   1976. 

Regulation  of  Surplus  Companies 

Each  state  has  passed  a  surplus  lines  law,  however,  they  vary 
in  detail.  Generally,  these  laws  place  the  primary  regulatory 
burden  upon  the  surplus  lines  broker.  Usually,  a  broker  who 
wants  or  needs  to  do  business  with  a  nonadmitted  insurer  must 
first  have  a  special  license.  Since  the  broker  is  responsible 
for  payment  of  the  premium  tax  (a  duty  normally  performed  by  the 
admitted  insurer),  the  broker  usually  posts  a  bond  guaranteeing 
payment.  Non-U. S.  based  surplus  lines  insurers  (called  alien 
insurers)  such  as  Lloyds  of  London  must  meet  specific  trust  fund 
requirements  set  by  the  surplus  lines  statutes  in  some  states  and 
must  be  on  the  insurance  commissioner's  "approved"  list  of 
insurers  in  other  states.  Another  distinctive  surplus  lines 
regulatory  feature  is  that  surplus  lines  brokers  must  file 
affidavits  within  a  prescribed  time  period,  such  as  30  days  after 
procuring  coverage.  These  documents  usually  state  placement  was 
not  made  for  a  lower  rate  than  that  available  from  admitted 
insurers . 

Several  state  insurance  departments  were  contacted  by  the 
insurance  contractor  requesting  information  on  the  impact  of 
surplus  lines  insurance  on  the  product  liability  market.  The 
state  regulators  commented  that  they  believed  that  there  has  been 
a  sharp  increase  in  the  involvement  of  surplus  lines  carriers  in 
product  liability  business  in  1976.  and  that  this  involvement 
will  undoubtedly  increase  in  1977   . 

Reinsurance 

Characteristics  of  Reinsurance  and  Coverage  Trends 

Ther,e  are  basically  two  types^_oX.  reinsurance--treaty  and 
facultaitrye .  Treaty  reTnsur^"nce  covers  an  entire  line  of 
insurance   whereas  facultative  reinsurance  covers  only  a  specific 


V-43 


risk.  Facultative  reinsurance  is  particularly  relevant  to  this 
discussion  since  it  is  ordinarily  used  in  those  cases  where  a 
risk  is  too  large  for  a  primary  insurer  to  wish  to  assume  it 
alone  or  where  the  risk  is  both  large  and  subject  to  substantial 
uncertainty.  Facultative  reinsurance  is  a  means  by  which  the 
primary  insurer  can  share  the  risk  on  a  particular  policy.  In 
effect,  the  primary  insurer  purchases  insurance  (facultative 
reinsurance)  to  provide  indemnification  against  certain  losses. 

The   Insurance   Study   indicates  there  is  a  trend  toward  more 
reinsurance  for  products  liability.   It  concludes: 

".  .  .During  our  interviews  with  reinsurers,  we  learned 
that  their  volume  of  facultative  business  trends  to  increase 
whenever  their  customers  (the  insurers)  are  particularly 
worried  about  a  given  line  of  business  or  class  of  risk. 
Thus,  during  1975,  they  wrote  a  large  volume  of  facultative 
medical  malpractice  coverage.  In  previous  years,  aircraft 
products  and  pharmaceutical  risks  passed  through  similar 
phases.  As  the  loss-cost  patterns  become  more  stable, 
insurers  write  these  exposures  more  willingly  and  the 
reinsurers  see  a  drop  in  the  demand  for  their  risk-bearing 
capacity.  .  ." 

".  .  .Although  our  underwriting  file  reviews  showed 
facultative  reinsurance  on  only  5%  of  the  policies  reviewed, 
several  of  the  reinsurers  we  interviewed  indicated  that  they 
are  writing  far  more  product  liability  coverage  today  than  5 
years  ago.  This  coverage  is  being  written  primarily  by  the 
traditional  treaty  method  (reinsurance  for  an  entire  line  of 
business--e  .g . ,  miscellaneous  liability),  but  an  increasing 
amount  is  being  written  through  facultative   arrangements   ." 

One  of  the  major  practical  differences  between  treaty  and 
facultative  reinsurance  is  that  facultative  reinsurance  is  more 
cumbersome  and  expensive  than  treaty  reinsurance.  Whereas  any 
underlying  policy  coming  within  the  scope  of  a  reinsurance  treaty 
is  automatically  covered  by  reinsurance,  the  primary  insurer  must 
take  care  to  see  that  a  policy  upon  which  facultative  reinsurance 
is  necessary  or  desired  is  reinsured  and  that  the  proper  amount 
of  the  premium  is  assigned  to  the  reinsurer.  The  home  office  or 
branch  office  copy  of  the  face  of  the  policy  (the  "daily  report") 


V-44 


must  be  suitably  noted  with  respect  to  the  nature  and  amount  of 
the  reinsurance  and  such  reinsurance  must  be  taken  into  account 
in  the  handling  and  payment  of  claims.  The  handling  of 
facultative  premiums  and  losses  is  likely  to  involve  greater 
detail  and  expense  than  treaty  reinsurance.  All  of  these  would 
appear  to  add  up  to  higher  cost  for  facultative  reinsurance  and 
higher  underlying  premiums  to  support  the  greater  cost  of 
facultative  reinsurance. 

Table  V-3?  indicates  reinsurance  premium  volume  for  American 
reinsurance  firms.  The  table  includes  both  treaty  and 
facultative  reinsurance. 

Product  Liability  Reinsurance  Premiums 

Total  reinsurance  premiums  for  product  liability  can  only  be 
roughly  estimated  because  the  reinsurance  premium  figures  are 
typically  attributed  to  a  range  of  liability  exposures.  However, 
the  Reinsurance  Association  of  America  estimates  that  total 
products  liability  reinsurance  premiums  probably  range  between 
$200  million  to  $300  million  annually  (1976  estimates).  They 
further  estimate  that  ^5%  to  20%  of  all  liability  policies  with 
products  coverage  are  currently  reinsured  by  treaty  or 
facultative  arrangements. 

The  Federal  Insurance  Administration  estimates  the 
reinsurance  portion  of  the  total  miscellaneous  liabilities  line 
at  $288  million  in  earned  premiums  in  1975.  If  this  estimate  is 
accurate,  the  Reinsurance  Association  of  America  estimates  are 
high.  That  is,  product  liability  reinsurance  premiums  in  1976 
might  be  $200  million  or  even  less. 

Regulation  of  Reinsurance 

Although  a  few  states  recognize  only  reinsurance  provided  by 
a  reinsurer  licensed  or  approved  as  a  reinsurer,  in  most 
instances  the  state  insurance  regulatory  authority  has  little 
hold  over  the  foreign  (i.e.,  out  of  state)  or  alien  (i.e.,  out  of 
country)  reinsurer.  Consequently  reinsurance,  whether 
facultative  or  treaty,  is  subject  to  little  regulation  at  the 
state  level  and  to  no  rate  regulation  at  all,  even  in  theory. 
The  statutory  criteria  contained  in  state   rate   regulatory   laws 


V-U5 


which   prescribe   rates  that  are  adequate,  not  excessive,  and  not 
unfairly  discriminatory  do  not  apply  to  reinsurance. 

Reinsurers  establish  their  own  incurred-but-not-reported 
reserves  and  reflect  these  reserves  in  their  rate  structures. 
Since  the  incurred-but-not-reported  reserves  of  the  primary 
insurer  are  bulk  reserves  not  placed  upon  the  individual  cases 
(and  thus  not  allocated  ratably  to  the  excess  reinsurer),  there 
would  appear  to  be  some  danger  of  redundancy  in  reserves 
resulting  from  the  cumulative  effect  of  the  respective  incurred- 
but-not-reported  reserves,  both  of  which  are  taken  into 
consideration  in  the  structuring  of  rates. 

Remote  though  the  original  insured  may  be  from  the  reinsurer 
in  terms  of  contractual  privity  or  relationship,  it  is  evident 
that  the  reinsurance  transaction  wields  a  pervasive  influence 
upon  the  underlying  insurance  transaction. 

Inasmuch  as  the  reinsurance  contract  is  purely  one  of 
indemnity,  if  the  primary  insurer  were  to  become  insolvent  and 
incapable  of  paying  the  losses,  the  reinsurer  would  escape  since 
there  would  be  no  loss  to  indemnity.  It  is  for  this  reason  that 
the  states,  through  statute  or  regulation,  refuse  recognition  of 
any  reinsurance  which  does  not  contain  an  insolvency  clause  to 
the  effect  that  the  reinsurance  shall  not  become  invalidated  or 
uncollectible  because  of  the  insolvency  of  the  ceding  insurer  but 
shall  become  payable  to  the  receiver,  rehabil itator ,  or 
liquidator  of  such  insurer. 

Impact  of  Reinsurance  and  Surplus  Line  Trends 
on  Product  Liability  Insurance 

On  the  basis  of  the  foregoing  it  seems  apparent  that,  at 
least  to  some  extent,  surplus  lines  carriers  and  facultative 
reinsurance  seem  to  be  having  a  positive  impact  on  the 
availability  of  product  liability  insurance  but,  on  the  other 
hand,  both  are  likely  to  significantly  increase  the  cost  of  such 
coverage  for  the  manufacturer  or  supplier  who  must  obtain  surplus 
lines  coverage  or  whose  policy  is  covered  by  facultative 
reinsurance.  Moreover,  the  fact  that  policyholders  and  claimants 
will   not,   in   many   instances,   receive   protection   from  state 


V-46 


solvency  guaranty  mechanisms  should  be  a   matter   of   concern   to 
insurance  regulators. 

CONCLUSIONS 

This  section  focuses  on  the  major  analytic  conclusions 
derived  from  the  examination  of  the  product  liability  insurance 
system  and  presented  in  the  preceding  sections,  and  provides 
certain  conclusions  regarding  the  manner  in  which  the  system 
might  be  adapted  to  more  adequately  achieve  its  objectives.  The 
most  apparent  finding,  and  one  which  permeates  each  of  the 
preceding  sections,  is  that  data,  specific  to  product  liability, 
are  lacking."  So  long  as  products  coverage  was  percefv^ed  by  each 
o^f^the  parties--claimants ,  insurers  and  product  manufacturers  and 
suppliers  as  stable  and  functional,  and  so  long  as  each  objective 
was  perceived  as  being  met,  the  need  for  specific  data  was 
neither  apparent  nor,  perhaps,  would  the  cost  of  attaining  them 
have  been  justified. 

As  the  preceding  sections  indicate,  however,  serious 
conflicts  have  arisen  among  the  parties  involved  and  significant 
economic  impacts  have  been  felt,  particularly  in  specific 
industry  sectors.  In  particular,  insurers  contend  that  the  costs 
of  claims  are  rising  dramatically  and  that  premium  increases  have 
been  essential  in  order  to  maintain  sufficient  funding  to  pay 
claimants  and  claim  costs  as  well  as  to  secure  a  profit. 
Manufacturers  and  suppliers  content,  on  the  other  hand,  that 
premium  costs  are  unreasonably  high.  Currently  there  are 
insufficient  data  to  adequately  assess  the  relationships  between 
premiums  and  claims.  The  data  that  are  available  indicate 
clearly  that  premium  increases  have  been  relatively  substantial, 
and  that  certain  industry  sectors  and  certain  types  of  firms  have 
been  particularly  affected  but  it  is  impossible  to  determine 
whether  or  not  the  situation  is  a  necessary  response  to  claims 
experience. 

In  view  of  the  volatility  and  uncertainty  currently  existing 
it  appears  that  certain  actions  should  be  considered  by  the 
insurance  companies,  insurance  regulators  and  policymakers  in 
order  to  increase  certainty  and  confidence  in  the  operation  of 
the   product  liability  insurance  system.   The  conclusions  reached 


V-47 


involve  data  collection,  ratemaking  and  regulation  and   financial 
disclosure  and  accountability. 

Better   Data   Should   Be   Collected   For   All   Product   Liability 
Insurance  Premiums ,  Losses  and  Claims . 

Premium,  loss  and  claim  data  should  be  collected  in  a  manner 
that  is  as  statistically  sound  and  reliable  as  possible  for 
ratemaking  and  other  purposes.  Data  on  all  product  claims,  such 
as  were  sought  in  ISO's  Closed  Claim  Survey,  should  be  collected 
on  a  continuous  basis  and  untrended  results  should  be  published 
annually.   Data  should  be  collected  from  all  insurers. 

The  improved  data  base  is  an  essential  first  step  in  the 
solution  of  product  liability  problems.  In  and  of  itself  it  will 
permit  examination  of  actual  trends  in  product  liability.  Many 
of  the  problems  which  have  arisen  in  product  liability  seem  to  be 
attributable  to  a  lack  of  actual  data,  and  to  a  significant 
amount  of  factually  unsubstantiated  rhetoric.  Much  has  been  made 
of  the  allegation  that  "one  million  product  liability  claims  were 
filed  in  1976,"  yet  ISO's  Closed  Claim  Survey  seems  to  indicate 
that  the  actual  number  of  total  claims  was  considerably  less  than 
100,000.  Similarly,  ISO  data  indicate  that  the  average  payment 
was  less  than  $20,000.  These  figures  are  significantly  lower 
than  those  which  had  been  claimed  by  some.  The  availability  of 
actual  data  will  provide  a  considerably  greater  degree  of 
certainty  than  currently  exists  and  should  considerably  improve 
the  decision  making  ability  of  insurers  and  others. 

The  improved  data  base  is  also  essential  to  the 
implementation  of  the  other  suggestions  made  in  this  section, 
particularly  those  related  to  ratemaking  and  its  regulation. 

Product   liabil ity   insurance   rates   and  premiums  should  be  more 
closely  related  to  statistical  assessments  of  product  risk . 

The  improved  data  base  and  the  availability  of  actual  data  on 
trends  in  product  liability  claims  could  permit  product  liability 
rates  and  premiums  to  be  more  closely  established  on  a  basis  more 
commensurate  with  actual  product  risk.  As  has  been  noted  in  this 
Chapter,  rates  for  most  risks  are  based  on  subjective  estimations 
of  anticipated  loss  costs.   Consequently,   it   is   not   currently 


V-48 


possible  to  draw  direct  correlations  between  premiums  and  product 
risk  and  significant  unexplained  differentials  exist  among 
premiums  charged  firms  producing  similar  products.  The 
preliminary  ISO  Closed  Claim  Survey  indicates  that  it  is  possible 
to  collect  data  on  all  claims,  but  the  results  also  indicate  that 
collecting  sufficient  data  for  ratemaking  purposes  for  some 
product  classes  may  be  very  difficult.  To  overcome  this  problem, 
consideration  should  be  given  to  expanding  those  product  classes 
where  experience  is  generated  slowly.  New  classes  could  be  made 
up  of  as  many  products  with  similar  risk  characteristics  as 
necessary  to  assure  that  enough  claims  to  provide  a  statistically 
reliable  ratemaking  base  would  be  reported  annually.  Insurers 
should  utilize  this  data  in  developing  premiums  that  are  related 
to  product  risk. 

Product  liability  insurance  rates  and  premiums  should  be 
monitored  to  ensure  that  they  are  fair ,  nondiscriminatory  and 
reasonably  related  to  product  risk. 

Insurance  regulators  are  empowered  to  monitor  and  review 
insurance  rates  and  premiums  to  ensure  that  they  are  fair  and 
nondiscriminatory.  In  the  area  of  product  liability  insurance, 
consideration  should  be  given  to  targeting  review  to  those  rate 
increases  which  exceed  a  threshold  amount.  Such  a  procedure 
would  focus  regulatory  attention  on  those  rates  and  premiums 
which  have  the  most  significant  adverse  effect  on  business.  Such 
regulation  could  also  promote  greater  uniformity  among  rates 
charged  by  an  insurer  to  firms  producing  products  with  similar 
risks . 

Since  insurance  regulation  is  currently  undertaken  only  at  a 
state  level,  it  is  essential  that  the  state  regulators  have 
access  to  a  data  base  which  includes  nationwide  experience  on  all 
product  liability  claims.  Regulators  need  such  a  data  base  in 
order  to  evaluate  rate  requests  effectively. 

There   is  a      need   to   promote   greater  financial  disclosure  and 
accountabil ity  in  product  liabil ity  insurance 

It  would  be  constructive  if  a  system  were  devised  whereby 
insurers  would  report   all   product   liability   experience   as   a 


V-49 


separate  line  on  the  Annual  Report  filed  with  the  State  Insurance 
Departments.  This  would  permit  examination  of  aggregate  product 
liability  experience  of  insurers.  Additionally,  it  would  appear 
to  be  in  both  the  insurers'  and  the  public  interest  for  insurers 
to  provide  information  which  would  enable  regulators  and  others 
to  get  a  more  accurate  assessment  of  the  insurers'  complete 
financial  situation  regarding  claims  and  reserves.  Accounting 
procedures  established  to  evaluate  solvency  are  clearly 
appropriate  for  that  purpose  but  insurers  should  also  report  on  a 
basis  that  assumes  continuation  and  takes  into  account  as  assets 
such  items  as  the  unearned  premium  reserve.  In  a  line  such  as 
product  liability,  where  there  is  a  relatively  long  period 
between  the  occurrence  and  ultimate  closing  of  some  large  claims, 
direct  account  of  the  investment  income  attributable  to  the 
established  reserves  should  be  made. 

Further  Studies  Should  Be  Undertaken 

Studies  should  be  conducted  on  reserving  practices,  including 
evaluation  of  methods  of  estimating  reserves;  the  disposition  of 
the  excess  of  reserves  that  are  not  ultimately  paid  to  claimants 
and  related  claims  expenditures;  and  the  appropriateness  of 
existing  loss  development  and  trend  factors. 

The  adoption  of  the  measures  suggested  above  should  lend 
greater  certainty  to  the  product  liability  insurance  situation 
and  assist  insurers  in  more  adequately  meeting  the  system 
objectives.  Additionally,  the  adoption  of  such  measures  will 
permit  evaluation  of  whether  the  uncertainty  and  lack  of  data 
have  themselves  led  to  premium  increases  which  may  ultimately  be 
determined  not  to  have  been  necessary  or  whether  the  actual 
claims  experience  fully  justifies  them  and  perhaps  even  requires 
further  increases. 

In  conclusion  the  Task  Force  believes  that  steps  outlined 
herein  will  help  address  one  of  the  causes  of  the  product 
liability  problem.  They  might  also  reduce  pressure  for  extensive 
government  involvement  in  the  area  of  product  liability  insurance 

regulation . 


V-50 


NOTES  TO  PRODUCT  LIABILITY  INSURANCE  SYSTEM 


"■see  Chapter  VI  and  VII. 

^The  ability  to  underwrite  additional  risks. 


^Throughout  this 
the  insured  and  the 
primary  policy  and 
insurer.  This  termin 
company  dealing  dir 
and  administering  cla 
(the  primary  policy 
insurer  may  have  made 
relate  to  the  prim 
party. 

Damages  covered 
damage  (PD) . 


chapter  the  insurance  contract  agreed  to  by 
insuring   company   is   referred   to   as   the 

the  insurer  is  referred  as  the  primary 
ology  is  used  to  differentiate  between  the 
ectly  with  the  insured  (the  primary  insurer) 
ims  under  the  policy  provided  to  the  insured 
)   and   those  insurers  with  whom  the  primary 

indemnification  or  other  agreements  which 
ary  policy  but  to  which  the  insured  is  not  a 


include  both  bodily  injury  (BI)  and  property 


-'Some  sources  refer  to  this  type  of  coverage  as  "discovery" 
basis  policies.  See  Zarpos  v.  Morrow,  215  F.  Supp.  887  (D.N.J. , 
1963). 


Potential   claims 
time  in  the  future. 


which   insurers   assume  will  be  made  some 


'''The   c 
the  risk  at 
the   scope 
proposed  ri 
retention; 
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and  discuss 
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o 

°As  used  throughout  this  discussion  the  word  "rate"  refers  to 
the  "amount  charged  per  unit  of  exposure,"  and,  unless  otherwise 
noted,  the  use  of  the  work  "rate"  implies  neither  derivation  from 
a  statistical  valid  experience  data  base  nor  regulatory  approval. 

^The  factual  information  on  the  rating  methods  is  based  on 
information  from  the  ISO  publication.  Product  Liability  Insurance 
Background  Report,  Dec.  1976. 

1  0 

Monoline  coverage  is  that  which  is  written  specifically  for 

one  type  of  liability;  e.g.   product   liability;   as   opposed   to 

multiline  policies  which  combine  different  types  of  coverages. 


V-51 


1  1 

Composite   rating,   as   well   as   Loss  rating  and  Large  (a) 

Rating  are  used  for  coverage  for  very   large   firms.    The   basic 

policies   are  either  monoline  or  multiline  but  the  rating  methods 

differ  from  those  of  smaller  firms. 

1  2 

ISO,   Product   Liability   Insurance  Background  Report,  Dec. 

1976  p.  7. 

1  "^ 
-■Questions   propounded   to   insurance   companies   on  June  2, 

1977,  by  the  Honorable  John  LaFalce,  Chairman  of  the  Subcommittee 

on   Capital   Investment   and   Business   Opportunities  of  the  U.S. 

House  of  Representatives  Committee  on   Small   Business.    Company 

responses   were   from:    Aetna   Life   &  Casualty,   Crum  &  Forster 

Insurance  Companies,  the  Hartford  Insurance  Group,  the   St.   Paul 

Fire   and   Marine   Insurance   Company,   the  Continental  Insurance 

Companies,  and  Liberty  Mutual. 


14 


Ibid. 


15 
16, 


See  Section  E,  p .  12. 


Based   on   "Product  Liability  Insurance  -  Background  Report 
on  Statistical  and  Rating  Procedures,"  ISO,  December,  1976. 

'''''see  pp.  VI-28. 

1  R 
°MAPI   -   Dimensions  of  the  Product  Liabil ity  Problem ,  April 

25,  1977. 


19 


20 


Insurance  Study, 
Insurance  Study, 


^^Prepared    by 
Administration . 

22see  Table  V-3. 


p.  2-21. 
p.  ES-5. 
Howard 


B.    Clark,    Federal 


Insurance 


^^See  ISO's   Product   Liability   Insurance   Report,  December 
1976. 

2^Memo  from  Howard  Clark  to  Task  Force  dated  8/23/77. 

^^ISO,  Preliminary   Report  on  Closed  Claim  Survey,  December 


1976. 


26 


See  pp .  31  . 


27 

28. 


Testimony,  op .  cit . 


'These  companies  are:  Aetna  Life  and  Casualty  Company  of 
Hartford;  The  Travelers  Indemnity  Company,  Hartford,  Connecticut; 
Hartford  Accident  and  Indemnity  Company  of  Hartford;  The 
Continental  Insurance  Company  of  the  State  of  New  York;  United 
States   Fire   Insurance   Company   of   New   York;   Liberty   Mutual 


V-52 


Insurance  Company  of  Boston,  Mass.;  Continental  Casualty  Company, 
Chicago,  111.  (CNA);  United  States  Fidelity  and  Guaranty  Company; 
St.  Paul  Fire  and  Marine  Insurance  Company,  St.  Paul,  Minn.; 
Royal  Globe  Insurance  Company  of  Chicago. 

^Testimony  of  Liberty  Mutual  Insurance  Companies  before  the 
Subcommittee  on  Capital,  Investment  and  Business  Opportunities  of 
the  Committee  on  Small  Business  on  June  28,  1977. 

3  As  noted  by  the  Insurance  Study  (p.  2-4)  "Individual 
insurance  company  reports  to  stockholders  and  to  A.  M.  Best's 
Reports  calculate  expense  components  as  a  percentage  of  written 
premium.  Insurance  Expense  Exhibits  filed  with  State  Insurance 
Departments  calculate  all  expense  components  as  a  percentage  of 
earned  premiums." 


31 


Standard   &   Poor's   Industry   Surveys,  Volume  1,  March  10, 


1977,  p.  1-24. 
3^Ibid  . 

33ibid.  p.  1-25. 
3^Ibid .  pp.  1-25-26. 
■^■^Insur ance  Study,  p.  3-16. 
36see  Insurance  Study,  p.  3-18. 


37 


Insurance  Study  p.  3-16. 


S^Minn.    Rev.    Code,    Ch .    72A.061,    as    amended    1977. 
S^House    bill    2410. 


V-53 


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V-55 


Table  V-3. — Product  Liability 
Rating  Methods^ 


Rating  Method 

Manual  rated 

(monoline  policies) 

Smal 1  ( a )  rated 


Package  policies 

Composite  rated,  loss 
rated  and  large  (a) 
rated 


Percent  of  Product     Product  Liability 
Liability  Total      Experience  Reported 
Premium  To  ISO 


10  -  15% 

30  -  35% 

30% 
20  -  3  0% 


Complete  detailed 
experience  reported 

Summary  experience 
only  is  reported 


None 


3 


None  broken  out 


1 
Source:    Based   of   information   provided   in  ISO's  Product 

Liability  Insurance  Background  Report,  December,  1976 

2 
In   197^   ISO   began   collecting  exposure  data  for  (a)  rated 

risks  in   classification   detail.    Future   rate   revisions   will 

reflect  these  data  which  are  essential  for  ratemaking. 

3 
ISO   is   planning  to  collect  these  data  in  the  future  in  the 

same  detail  as  is  done  for  manual  rated. 

4 
Only   summary   data   for   all   general  liability  experience, 

including  products  liability,  are  reported. 


V-56 


Tabic  V-iJ, 


Basic  Monol  inr  Rate  Increases  _for  Product.  Liability  Insurance 
December  197b  Over  Aup.ust  1975 


Product  Classes  -  Manufacturing 


Tanks  metal  (not  pressurized) 

Metal  goods  manufacturer 

Machinery 

Construction,  mining  4  materials 

handling  equipment 
Trailers,  mobile  homes 
Campers,  camper  bodies 


Rate 

Type 

Rate 

increases 

(a) 

(a) 

(a) 

(a) 

(a) 

(a) 

Rate 

.no  r 

eases 

Aug  .  75  Comb  Ined 

PI  K    PD  Rate 
Per  $1 , OOP  Sales 


.45 
10-1 . 30 
2.60 


70 
50 
50 


Dec.  76  Combined 

BI  I,    PD  Rate 
Per  $1 , 000-  Sales 


$      5.00 
.75-15.00 
20.00 

12.50 

5.50-16.00 

10.50 


Percent 
Increase 
In  Rate 


1,011$ 
650-1  ,05*4% 
669% 

63556 

267-967% 
600% 


of   MOO    to    600% 


Industrial  machinery  equipment 
Metal  working  machinery  and 

equi  pmen  t 
Motor  vehicles,  personal  type 
Wire  rope  or  cable 
Trucks,  bodies 
Toys 
Power  equipment  -  household  type 


Tools,  hand  typo  (powered) 

Trailers 

Playground    &    exercise    equipment 

Val ues 

Auto    bodies    excluding    trailers 

Tools,    hand    type    (not    powered) 

Food-processing    or    packing    equip. 


Food    -    animal    use 

(manufacturing/ packer) 
Bottles    and    jars 
Electrical    generating    machinery 
Cases    in    steel    cylinders 
Electric    appliances   equipment 

-    household    type 
Pumps 

Railroad    equipment    -    mobile    type 
Products    (not    otherwise    classified) 
Cutlery    (not    powered    or    flatware) 
Swimming    pools   or    accessories 
Computers 

Metal    goods    stamping    (not    signs) 
Auto,    bus,    truck    parts 
Instruments    -    analytical,    testing 

&    recording 
Instruments   -    control 
Ammunition    including    component    parts 
Engines    -    turbines   not    aircraft 
Medical,    dental,    surgical    diagnostic 

treatment   machines 
Ammun  ition 
Instruments 
Furniture    &    equipment    (infant) 


Detergents    -    household    use 
Signs,    metal 

Signs    (not    otherwise    classified) 
Seedsmen,    including   misdelivery 

&    germination    failure 
Sporting    goods 
Plastic    &    rubber    goods 
Seedsmen,    including   misdelivery, 

excluding    gerimation    failure 
Tools,    dies,    jigs    and    fixtures 
Fireproofing    equipment 
Bolts,    nuts    &    screws 
Cans,    metal    (pressurized) 
Bus    bodies 


(a) 

$ 

2.60 

$  7 

50-27.50 

189 

-958% 

(a) 

3.00 

10 

50-27.50 

250 

-817% 

(a) 

1  .75 

5 

50-16.50 

214 

-843% 

(a) 

.95 

5.50 

479% 

(a) 

1.70 

9.50 

459% 

(a) 

.83 

4.20 

406% 

(a) 

2.70 

5 

50-21 .50 

104 

-696% 

Rate  increases 

of  300  to  iJOO? 

(a) 

$ 

2.70 

$  5 

25-21.50 

94 

-696% 

(a) 

1  .70 

4 

50-1 1 .00 

165 

-547% 

(a) 

1.70 

7.65 

350% 

(a) 

1  .20 

5.00 

317% 

(a) 

1.05 

4.30 

310% 

(a) 

.65 

2.65 

308% 

(a) 

4.00 

1  1 

00-21.00 

175 

-425% 

Rate  increases 

of  200  to  300% 

(a) 

$ 

.28 

$ 

1  .  10 

293% 

Manual 

1.37 

5.27 

285% 

(a) 

.95 

3.35 

253% 

(a) 

.65 

2.25 

246% 

Manual 

.32 

1  .  10 

244% 

(a) 

.95 

3.25 

242% 

(a) 

.90 

3.00 

233% 

(a) 

.85 

2.80 

229% 

Manual 

.50 

1.61 

222% 

(a) 

1.30 

4.15 

219% 

(a) 

.95 

3.00 

216% 

(a) 

, 

0-1 .30 

35-3.50 

250 

-169% 

(a) 

2.35 

7.25 

209% 

(a) 

1.30 

4.00 

208% 

(a) 

1.30 

4.00 

208% 

(a) 

.85 

2.60 

206% 

Man  ua 1 

.90 

2.75 

206% 

(a) 

3.30 

10.  05 

205% 

(a) 

1  .70 

5.16 

204? 

(a) 

.25 

.75 

200% 

(a) 

.85 

3.00 

200% 

Rate  increases 

of  15C 

to  200% 

Man  ual 

$ 

.66 

$ 

1.97 

199% 

Manual 

.60 

1.75 

192% 

Manual 

.60 

1.75 

192% 

Man  ual 

1  .07 

3.10 

190% 

Manual 

.90 

2.60 

189% 

(a) 

.35 

1.00 

186% 

(a) 

.57 

1.60 

181% 

Manual 

.49 

1.37 

180% 

(a) 

.90 

2.50 

178% 

Man  ual 

.49 

1.31 

167% 

Manual 

1  .  17 

3.07 

162% 

(a) 

2.  10 

5.50 

162% 

V-57 


Table    V-U .-- (Continued ) 


Product    Classes   -    Mar.ufacturing 

Caskets 

Parachutes 

Doors    4    windows,    metal 

Chemicals   -    household    use 

Auto,    bus,    truck   brake    linings 

Boats    -    inboard,    outboard 

Boats 


Cans,  metal  (not  pressurized) 

Firearms 

Firearms  -  handguns,  rifles  and 

shotgun  s 
Hatcheries  (poultry) 
Plastic  &  rubber  goods  -  household 
Medical,  dental,  hospital  or 

surgical  equip,  (not  expendable) 


Orthopedic,  ambulation  or 

prosthetic  devices 
Electrical  wire  or  cable 

( insulated ) 
Electric  wire  &  cable 
Seedsmen,  excluding  misdelivery 

&  germination  failure 
Clothing,  millinery  or  other 

wearing  apparel 
Automobile,  bus,  truck  tires 
Office  and  accounting  machinery 

(not  computers) 
Meats  and  poultry  (not  in 

containers) 
Automobile  accessories 
CheiTiicals  -  herbicides 
Abrasive  wheels 


Aug  . 

75  Combined 

Dec  . 

76 

Combin 

ed' 

Percent 

Rate 

BI 

&  PD  Rate 

BI 

& 

PD  Rate 

Increase 

Type 

Per 

$1  ,000  Sales 

Per 

$1  , 

000  Sal 

es 

In  Rate 

Manual 

.05 

.135 

160J 

(a) 

1.25 

3.25 

160? 

Manual 

.22 

.57 

159J 

(a) 

1.85 

4.75 

157J 

(a) 

1.95 

5.00 

156% 

Manual 

1.  10 

2.75 

150% 

(a) 

1.  10 

2.75 

150% 

Rate  increase 

■s  of 

100  to  150% 
$   .55 

$ 

1.  13 

Manual 

147% 

Manual 

.85 

2.  10 

117% 

(a) 

1.70 

'».  15 

14U% 

(a) 

1.07 

2.60 

143% 

(a) 

.HO 

.95 

138% 

(a) 


2.55 


Rate     increases    of    100    to    150%    cont'd. 


(a) 

Manua  1 
(a) 

(a) 

Manu  al 
(a) 

(a) 

Manual 

Manual 

(a) 

(a) 


$2.55 

.65 
.65 

.27 

.066 
6.93 

.35 

.099 
.55 
1.95 
2.21 


6.05 


6.05 

1  .50 
1  .50 

.60 

.  146 
15.  13 

.75 

.209 
1.  16 
4.00 
4.50 


137% 


137% 

131% 
131% 

122% 

121% 
1  18% 

1  14% 

111% 
1  1  1% 
105% 
104% 


Prod  uct  Classes 
Kanuf ac  tur ing 


other  than 


Rate  increases  of  100%  or  more 


Machinery  &  equipment,  not 

household  type  (a) 
Structural  iron  &  steel, 

excluding  erection  (a) 

Tobacco  products  Manual 
Not  food  or  drink  (not  otherwise 

cl assi  f ied )  (a) 

Gas,  oil  or  other  fuel  Manual 
Soft  drinks,  carbonated  in 

cans  (bottler)  Manual 

Electric  (retailers)  Manual 

Refrigeration  equipment  Manual 

Boat  yards  4  marinas  (a) 


$  2.60 

.65 
.031 

.20 

.96 

.181 
.38 
.40 
1.45 


$  7.50-27.50 


2 

.50 

.  101 

.65 

2 

.60 

.  441 

.89 

,88 

3, 

,00 

189-958% 

285% 
226% 

225% 
171% 

144% 

134% 
120% 
107% 


Source : 


ISO 


V-58 


Table  V-5 . — Increased  Limits  Factors 
For  Bodily  Injury  and  Property  Damage 

Bodily  Injury  Limits 


Aggregate 

Limit 

(Limit  are 

in  thousands) 


Limits  per  Occurrence 
(Limits  are  in  thousands) 


50 

100 
200 
250 
300 


25 
1  .00 


50 

1.29 
(1.33) 


100 


1  .85 
(1.95) 


200 


2.38 
(2.62) 


250 


300 


2.60 
(2.90) 


2.76 
(3.12) 


1 
There   are   two   sets  of  increased  limits  factors  for  bodily 

injury  which  correspond  to  the  two  tables  (Tables  A  &  B)   product 

liability  monoline   rates   published   by   ISO.    The  majority  of 

product  classes  are  contained  in  Table  B.   The   increased   limits 

factors    for    Table   A   product   classes   are   shown   above   in 

parentheses,  and  those  for  Table   B   product   classes   are   shown 

without  parentheses. 

Source:   ISO  Rate  Manual,  Edition  November  1976. 


Property  Damage  Limits 


Ltmit 
(LImlOars 

Limit  per  Occurrence 
(Limits  are  in  thousands) 

In  thouumdt) 

5 

7.5 

10 

15 

20 

25 

35 

50 

25 
35 
50 
75 
100 

1.00 
1.06 
1.12 

i.ia 

1.24 

1.30 
1.42 
1.48 
1.54 
1.60 

1.54 
1.66 
1.72 
1.73 
1.84 

1.72 
1.84 
1.95 
2.03 
2.14 

1.S4 
1.05 
2.03 
2.20 
2.26 

1.95 
2.08 
2.20 
2.32 
2.38 

2.20 
2.33 
2.50 
2.56 

2.56 
2.74 
2.80 

V-59 


Table  V-6.  — _?]"_0(:i ucjt  Liability  Classes 
V.' i  t h  f^'onol  ine  Premiums 
o_f  $10  or  Mo r e  Per  S  1  ,  OOP  of  Sales  For  Coverage  of 
$250,000  BI,  $5  0, COO  PD ,  Per  Occurrence 


Product  Class 


Basic  Limits  Rates 


!I  Rate 


PD  Rate 


Combined  Rates 
For  $250,000  BI, 
$50,000  PD,  Per 
Occurrence 


Fuels,  Gasoline,  Oil  or  Other 
Liauid  Fuel 


2.60s 


3.  40 


17.  06 


Hanuf ac tur  ing 


Abrasive  Wheels 

Ammun i t ion- incl .  component  pts. 

Hand    Guns,    Rifles,    Shotguns 
Automobiles,    Buses   or 

Tr  ucks 
Auto  Bodies-excl.  trls. 
Auto  etc.  Brake  Lining 
Auto  Bus  Trk.  Pts. 
Automotive  Mfgr. 

Water    Spring    in    Bottles 

Not    Sparkling    or    Carbonated 

(Bottler) 
Water    Sparkling 
Bus    Bodies 
Campers    and    Camper    Bodies   - 

not    Trailers 
Chemicals-Herbicides 
Chemicals--H . H.     Use 
Construction    Mining    and 

Material    Handling    Equipment 
Contact    Lenses 
Electrical    Equi pment-for    Direct 

and    Indirect    Application    to 

the    Body 
Farm    Machinery   &    Equip. 

Fire    Extinguishers 

Fire    Arms    Handguns,    Rifles 

&    Shotguns 
Food    Processing    or    Packaging 

Equi  p . 
Industrial    Machinery    & 

Equip. 
Instruments-Analytical    Calibrating , 

Testing  or  Recording 
Instruments-Control 
Ladder s-Incl .  Chair  Step  or 

Stool-Wood 

Ladders-Inc.  Chair  Step  or 

Stool- 
Machinery 
Medical,  Dental  Hospitals  or 

Surgical  Equip.  Non-Expendable 


4.  00 


50 


1 1. 80( 


5.00 

.  16 

13.45g 

/   .75 

to 

/ 

.05 

to 

/  2.32 

/I  0. 00 

.50 

/30. 40@ 

4.00 

.30 

12.440 

4.50 

.50 

14.45^ 

6.00 

1 

.25 

20. 90g 

/  4.00 

to 

/ 

.25 

to 

/I  1  .  10 

/lO.OO 

/ 

.75 

/28. 10@ 

6.80 

.29 

6.60 

.  18 

5.  00 

.50 

10.00 

.50 

2.50 

1.50 

4.50 

.25 

10.00 

2.50 

7.50 

.  11 

90.50 

49.  50 
15.00 

6.  00 


25 


/  3.00 

to 

/15.00 

50 

2.50 

1 

.50 

4.00 

.  15 

/10. 00 

to 

/20.00 

1 

.00 

/  5.00 

to 

/2 

.50  to 

/20.00 

/7 

.50 

2.  50 

1 

.50 

2.  50 

1 

.50 

.08 

.08 
5.  00 

.05 


18.49 
17.66 
14. 40@ 


27 

10 
12 

33 
19 


40@ 
70@ 

40^ 

OOg 
81 


10.58 

/40. 40@ 
10.70@ 

1 0. 82§ 
/28.80 

54.800 
/20. 00 
/73.OO0 

10.700 
10.700 

235.52 

128.92 
53.000 

15.740 


V-60 


Product  Class 


Basic  Limits  R a t e s ^ 
BI  Hate    PD  Rate 


Combined  Rates 

For  $250,000  BI, 

$50,000  PD,  Per 

Occurrence^ 


05 
?5 


Medical,  Dental,  Hospital  or 

Surgical  Diagnostic  or  Treatment 

Machines  10.00 

Metal  Goods  /   .50     / 

/10.00      /5.00 

Metal  Goods  Stamping  not  Signs  /   .25     /  .10 

/  2.50      /I .00 

Metal  V/orking  Machinery  /10.00     /  .50 

and  Equip.  /25.00      /2.50 

Motor  Vehicles  Personal  /  5.00 

Type  /15.00 
Orthepedic,  Ambulation  &  Prosthetic 

Dev  ices  6.00 

Playground  or  Exercise  Equipment  7.50 
Power  Equipment 

H.H.  Type-Outdoor  &  V.'orkship  20.00 

Swimming  Pools  or  Accessories  4.00 

Tanks-Metal-not  Pressurized  4.00 

Tanks-Metal  /   .50 

Pr essur  i  zed  / 1 0. 00 

Tools-Hand  Type  /  5.00 

Powered  /20.00 

Toys  4.00 

Trailers  /  4.00 

/10.00 

Trailers  -  /  5.00 

Mobile  Homes  /15.00 

Truck  Bodies  7.50 

Valves  2.50 

V/ire  Rope  or  Cable  5.00 


/ 

.50 

/I 

.50 

.05 

.  15 

1 

.50 

.  15 

1 

.00 

/ 

.25 

/5.00 
/  .25 
/I  .50 
.20 
/  .50 
/I  .50 


/ 

.25 

/I 

00 

2 

00 

2 

50 

50 

26. 14@ 
/  2.00 
/40.00g 


93 
30@ 


/27.40 
/72.00@ 
/14.40 
/40.20@ 


15.74@ 
19.920 


56. 

10. 

13. 
/  2. 
/40, 
/13. 
/56. 

10, 
/I  1. 
/30, 
/13. 
/41, 

25, 

13. 

14, 


20g 

82§ 

20@ 

00 

OOg 

70 

20@ 

96@ 

80 

200 

70 

80§ 

100 

50Q 

400 


Service 


Beauty  Parlors 

Stores  or  Dealers-Retail 


2.50 


2.50 


13.500 


Machinery   &    Equipment 
not    H.H.    Type 


/    5.00 
/20.00 


/2.50 
/7.50 


/20.00 
/73.OO0 


'/=A    range   of    (a)    rates    for    a    specific    product   class. 
^0=  (a)    rates 


V-60a 


Table  V-7. --Effect  of  ISO  Revisions 
On  Product  Liabil ity  Premium  Rates 


Basic  Limits 


Overall 
Percentage 
Increase 


Bodily  Injury  ( BI ) 


Property  Damage  (PD) 


+  83.5 
+  15.0 


Increased  Limits  Factors 

(applied  to  manual  and  (a)  rates) 


Table  B  ("Standard"  increased  limits  factor) 


+200. 3 


Table  A  (Increased  limits  factors  higher 
than  "standard"  applied  to  90  of 
the  418  product  classifications) 


+  74.5 


1 

Composite   of  ISO  estimates  of  overall  countrywide  impact  of 

rate  revisions  of  1975  and  1976  by  type  of  increase.  Basic 
limits  rates  are  for  BI  limits  of  $25,000  per  occurrence  and 
$50,000  aggregate.  PD  limits  are  for  $5,000  per  occurrence, 
$25,000  for  all  damages. 

2 
Excludes   six   states   that   use  exception  tables  for  bodily 

injury  increased  limits  factors.   Increased   limits   factors   are 

applied   against   the   basic   limit   rate   to   raise  the  limit  of 

liability  to  the  desired  level.   An  individual  factor  is  used   to 

derive   the  applicable  rate  for  each  level  of  increased  liability 

desired . 


Source:    Product   Liability: 
Company,  Inc.,  January  1977. 


Insurance  Study,  McKinsey  and 


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V-6U 


Table  V-1 1 . — Comparative  Analysis  of  Leading  Indicators 

for  Sr.all,  Medium  and  Large  firms 

Industry  Telephone  Survey 


CGL  Cost/$l ,000  Sales 

nrn 

1975 

1976 


Under 

Over 

12.5  mil . 

£2. 

5-$100 

iti  11 . 

$100  mil . 

Total 

$2.87 

$1 

25 

$0  .  67 

$1  .  17 

4.86 

2 

36 

0.89 

2.32 

1.H2 

3 

88 

1  .24 

3.59 

Estimated  Product  Liability 
Insurance  Cost/$1 , OOP  Sales 

1971 

1975 

1976 


$1  .  10 
2.58 
5.32 


$.93 
1  .47 
3.23 


$0.  54 
0.73 
1  .09 


$0.74 
1  .  40 
2.81 


Percent  Change 
197  1-1976 
1975-1976 


383X 
106X 


247X 
120J 


102% 
39J 


2805 
1015 


Average  Ded  uc t i  bl e  or  Risk 
R e t"e n t i o n  Level  ($0007 
1971 
1975 
1976 


13.2 
8.9 
7.4 


57.3 

54.3 

51.0 

33.6 

207.4 

138.3 

120.4 

334.5 

232.6 

Percent  of  Firms  Reporting  Claims 
1971-1976 


50 


96 


56 


Average  No .  of  Pend  ing 

CliTns  Per  Firm 

1971 

1975 

1976 

Percent    Change 
1971-i'97d 
1975-1976 

Average  No .  of  New  Claims  Per  Firm 
1971 
1973 
1975 
1976 


.01 
.06 
.08 


700S 
33X 


,02 
.06 
.08 
,07 


.58 
3.18 

13.79 
46.82 
65.01 

3.4 
14.0 
18.9 

496% 
9% 

371'. 
39% 

456? 
35% 

.9 
1  .2 

1.6 
1.3 

16.  1 
39.0 
38.2 
33. '^ 

4.3 
11.1 
11.4 

9.9 

A V e r a p, e  Amount  of  Damages 

Sought  Per  Firm 

1971 

1975 

1976 


$250 
,400 
,  100 


$102,  100 
1 ,642,900 
1 , 394, 300 


$1  ,936,700 

6, 142, 300 

13,892,400 


$434,000 
1 ,976,700 
3,526,900 


Average  Settlement  Amounts  Per  Firm 

1971  $900 

1973  600 

1975  100 

1976  100 


M  ,  400 
3,200 
6,  100 
7,500 


45,400 
96,200 
70,200 
92, 100 


$12,  100 
28,200 
22,200 
27,800 


Source:   Product  Liability  Industry  Telephone  Survey,  Gordon  Associates,  Inc., 
December  1976,  Tables  IV-10,  IV-12,  IV-15,  IV-21,  IV-26  and  IV-28. 


V-65 


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Table  V-13, — Estimated  Allocation   of  Total 
1 976  Product  Liabil ity  Premiums 

TABLE  I 
(In  bill  ions) 


Premiums 

Underwriting  expense  and  profit 

Loss  and  loss  adjustment  expense 

Loss  adjustment  expense 

Defense  legal  costs 

Claimants'  legal  costs 

Combined  legal  costs 
Combined  legal  costs  and  other 

adjustment  expense 
Claimants'  compensation 


$2,080 
.832 


1 


250 
.416 
.354 
.250 
.604 

.666 
.584 


TABLE  II 
(In  billions) 


Premiums 

Underwriting  expense  and  profit 

Loss  and  loss  adjustment  expense 

Loss  adjustment  expense 

Defense  legal  costs 

Claimants  legal  costs 

Combined  legal  costs 
Combined  legal  costs  and  other 

adjustment  expense 
Claimants'  compensation 


$2,080 
.624 
1.456 
.416 
.354 
.312 
.666 

.728 
.728 


Source:   Federal  Insurance  Administration,  August,  1977 


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V-68 


Table  V-15. — Product  Liabil ity  Insurance  Incurred  Losses 


1 


Policy  Year 
Ending 


Bodily  Injury  and  Property  Damage  Combined 

2  3             4 

Reported  Incurred  But         Total 

Losses  Not  Reported  Losses   Incurred  Losses 


Basic  Limit  Losses 


12/31/69    $  39,479,760 


12/31/70 
12/31/71 
12/31/72 

12/31/73, 
12/31/74- 


57,572,016 
61 ,212, 153 
69,575, 160 
105,499,455 
88,799, 192 


10,735,010 

1 ,  178,798 

2,622,853 

9,248,235 

35,688,490 

61 ,  153,814 


$  50,214,770 

58,750,814 

63,835,006 

78,823,395 

141 ,  187,945 

149,953,006 


Excess  Limit  Losses 


12/31/69 

12/31/70 

12/31/71 

12/31/72 

12/31/73, 

12/31/74 


19,424,715 
32,582,433 
46,498,334 
40,253,234 
61,508,039 
69,300,391 


7,614,687 

690,399 

2,083,997 

3,366,195 

16, 197,981 

83,462,868 


27,039,402 
33,272,832 
48,582,331 
43,619,429 
77,706,020 

152,763,259 


1 
Represents   manual   and   small   (a)   rated   classes   for  all 

companies  reporting  to  ISO. 

2 
Latest  reported  losses  including  all  adjustment  expense. 

3 
Estimated    on    the    basis   of   current   loss   development 

estimating  procedures. 

4 
Total   ultimate  losses  including  estimated  incurred-but-not- 

reported  loss-es  and  all  loss  adjustment  expense. 

5 
Preliminary   data  based  on  first  report  for  the  policy  year. 

Source:   Insurance  Services  Office,  May  1977. 


V-69 


1 

Table  V-1 6 . --Product  Liabil ity  Insurance  Incurred  Losses 

Bodily  Injury 

2  3  4 

Policy  Year     Reported       Incurred  But         Total 

Ending        Losses    Not  Reported  Losses   Incurred  Losses 

Basic  Limit  Losses 


12/31/69 

$  28,766,682 

$  11,336,631 

$  40,  104,414 

12/31/70 

45,  110,359 

1 ,066,647 

46,  177,006 

12/31/71 

48,655,707 

2,396,833 

51 ,052,540 

12/31/72 

54, 125,276 

8,692,042 

62,817,318 

12/31/73 
12/31/74 

86,570,003 

34,969,171 

121,539, 174 

70,881 ,071 

57,838,959 

128,720,030 

Excess 

Limit  Losses 

12/31/69 

13,711,981 

7,294,775 

21 ,006,756 

12/31/70 

25,570,271 

690,399 

26,260,670 

12/31/71 

38,592,487 

2,083,997 

40,676,484 

12/31/72 

30,501 ,737 

3,385,692 

33,887,429 

12/31/73 
12/31/74 

48,  157, 106 

15,410,275 

63,567,381 

53,371,793 

78,349,789 

131 ,721,582 

1 

Represents   manual   and   small   (a)   rated   classes   for  all 
companies  reporting  to  ISO. 

2 
Latest  reported  losses  including  all  adjustment  expense. 

3 
Estimated    on    the    basis   of   current   loss   development 

estimating  procedures. 

4 
Total   ultimate  losses  including  estimated  incurred-but-not- 

reported  losses  and  all  loss  adjustment  expense. 

5 
Preliminary   data  based  on  first  report  for  the  policy  year. 

Source:   Insurance  Services  Office,  May  1977. 


V-70 


1 

Table  V-17* — Product  Liabil ity  Insurance  Incurred  Losses 

Property  Damage 

2  3  4 

Policy  Year     Reported       Incurred  But         Total 

Ending        Losses    Not  Reported  Losses   Incurred  Losses 

Basic  Limit  Losses 


12/31/69   $  10,713,078 


12/31/70 
12/31/71 
12/31/72 

12/31/73, 
12/31/74 


12,461 ,657 
12,556,446 
15,449,884 
18,929,452 
17,918, 121 


(601 ,621  ) 
1 12,  151 
226,020 
556,  193 
719,319 
3,314,855 


$  10, 111 ,457 
12,573,808 
12,782,466 
16,006,077 
19,648,771 
21 ,232,976 


Excess  Limit  Losses 


12/31/69 

12/31/70 

12/31/71 

12/31/72 

12/31/73, 

12/31/74' 


5,712,734 
7,012, 162 
7,905,847 
9,751 ,497 
13,350,933 
15,928,598 


319,912 

-0- 

-0- 

(  19,497) 

787,706 

5,  113,079 


6,032,646 
7,012, 162 
7,905,847 
9,732,000 
14,  138,639 
21 ,041 ,677 


1 
Represents  manual   and   small   (a)   rated   classes   for  all 

companies  reporting  to  ISO. 

2 
Latest  reported  losses  including  all  adjustment  expense. 

3 
Estimated    on    the    basis   of   current   loss   development 

estimating  procedures. 

4 
Total   ultimate  losses  including  estimated  incurred-but-not- 

reported  losses  and  all  loss  adjustment  expense. 

5 

Preliminary   data  based  on  first  report  for  the  policy  year. 

Source:   Insurance  Services  Office,  May  1977. 


V-71 


Table    V-18. --Pfo^lurl-;   GpnT.iMnp,    Mo.-it    Payment    DoUf 
'oUlT/     irljur  ) 
(Uri tr-riiaoo    aod    Irr-nded) 
(Tren-ied   Va.ues   ^ire    In   farcnthoses) 


Product 
"Cod  c  /Tl  ame 

061    Electrical    Appliances 

or    Equip.    (Installation, 
service  or   repair) 

212  Miscellaneous 
Machines 

Oil  Clothing  (synthetic) 
(not  shoes,  boots  or 
si  ippers) 

172  Chemicals 


901)  Tractors,  Trucks, 

Mobile  Homes,  Cacpers 

165  Other  Metal  Goods 
933  Asbestos 


198  Surgical  or  Hospital 
Equip.  &  Supplies 

215  Food  Processing 
Equipment 

218  Fork  Lift 


1H2  Motor  Vehicle 
Accessories 

921  Containers  -  Boxes, 
Packages,  etc. 

906  Cloth,  Fabric,  Thread, 
etc . 

101  Lights  -  Bulbs 

117  Glassware,  Porcelain, 
Pottery  (Bottles) 

919  Laundry  Centrifugal 
Extractor 

166  Firearms  (Parts 
Included) 

138  Automobile 

161    Tools    (Powered) 

012   Clothing    (non-synthetic! 
(not    shoes,    boots  or 
si Ipper s) 

902    Intrauterine    Device 

211   Agriculture   Equip., 

Excluding    Food    Prccesslrg       (1.1) 

080    Air    Conditioning 

Installation,    Servicing 
or    Repairs 

1  1  1    Chairs 

139  Snowmobile 


152    Bolts,    Nuts   4    Screws, 
Nails 

192   Ml scell nneous    Electrical 
Apparatus 


t  of 

Total 

Average 
of  Non-Zero 

Number 
With 

Payment 

Payments 

Payment 

1.5 
(6.7) 

$    52,011 
(236,332) 

25 

6.3 

'6.1) 

12,522 
(129,577) 

t3 

5.5 
'6.2) 

176,181 
(605,023) 

9 

1.9 
'5.6) 

22,391 
(205,827) 

21 

5.6. 
(5.0) 

53,962 
(115,527) 

30 

1.7 
'.5.1) 

97,319 
(281,911) 

11 

2.2 

n.9) 

81,128 
(127,819) 

8 

3.7 
(3.8) 

30,791 
(91,111) 

35 

1.7 
!3.1) 

61,165 
(313,918) 

8 

3.6 
(2.9) 

80,905 
(197,800) 

13 

2.8 
(2.7) 

19,378 
(57, 111) 

12 

2.7 
(2.2) 

52,018 
(126,686) 

15 

2.2 
(2.1) 

103,800 
(306,250) 

6 

0.6 
(2.1) 

27, 167 
(286,971) 

6 

1.3 
(1.7) 

6,205 
(25,281) 

59 

0.7 
(1.7) 

195,000 
(1,151,700) 

1 

2.2 
(1.1) 

57,605 
(108,258) 

1  1 

0.8 
(1.3) 

8,820 
(13,632) 

27 

1.1 
(1.3) 

16,101 
(15,928) 

1.3 
(1.2) 

31,838 
(89,512) 

12 

1.9 
(1.2) 

9,133 
(18,688) 

58 

1.9 
(1.1) 

11,368 
(76, 111) 

1.2 
(1.0) 

175,250 
(121,518) 

2 

1.5 
(I.O) 

11,102 
(30,363) 

29 

1.0 
(l.C) 

71,250 
(217,185) 

1 

1.2 
(1.0) 

88, 125 
(216,198) 

1 

l.C 
(1.0) 

18,333 
(111,818) 

6 

Source:  Insurance  Service?  Office,  _1_976  fri^^-PS-t  liability 
CI  osed  Cljilni  Survey  ,  f  r_eljir_l  n_ar  y  An.Tl  y?i  s  of  Sur_v_cy  Rr.'^ul  t  B  , 
Tioi-ombor"   l'jT6.  " 


V-72 


Table  V-19.  — Products  .".c^ 

(Untron 
(Trended  Valu 


Product 
Code/Name 

142  Motor  Vehicle 
Accessor  ies 

215  Food  Processing 
Equi  pmen t 

069  Roofing 

026  Plumbing  Fixtures 
4  Fittings 

217  Petroleum,  CheTiical  anJ 
Drug  Products 
(Industrial ) 

214  Agricultural  Equipment 
Excluding  Food 
Processing 

155  Paint  or  Varnish  or 
Paint  Remover 

059  Boiler  Installation, 
Servicing  or  Repair 

088  Systems  or  Refrigeration 
Installation,  Services 
and  Repair 

165  Other  Metal  Goods 


077  Sewer  Constr uc-ion , 
Cleaning  or  Repair 

050  Construction  or 
Sur  fac  ing 

161  Valves 


006  Food  (Bagged,  Potted, 
Boxed  Except  Keat 
Products)  Mo  Canned 
Food  s 

115  Fire  Extinguisher 
113  Tires  (Non-Belted) 


151  Electrical  Parts 
and  Accessor  if;  3 

910  Oil  Furnace 


958  Busines-;  FquipTont  - 
Office  Furniture 


n  e  r  a  t  i  n .;    '. 

'.vt    Paytrn»nt    Doll 

'ir  3 

perty    D.tm 

>^.  e 

dec    and    Ti 

ended) 

. 

OS    are    in 

Parentheses) 

t    of 

Average 

Njmbor 

Total 

of    Non-2ero 

With 

Fay'-nent 

Payments 

Payment 

16.5 

$      26,. -59 

(22.3) 

(63, B3) 

19 

7.0 

22,C33 

(11.0) 

(69, 119) 

21 

5.  1 

12,f 91 

(6.3) 

(30,^32) 

31 

2.8 

9,651 

(1.2) 

(27,736) 

23 

5.0 

8,570 

(1.0) 

(13,323) 

16 

^■.3 

33,571 

(3.7) 

(55,329) 

10 

3.8 

13,597 

(2.9) 

(20,C42) 

22 

2.C 

8,252 

(2.8) 

(22,551  ) 

19 

1.5 

23,903 

(2.7) 

(81,248) 

5 

3.9 

38,237 

(2.1) 

( 1 5  ,  ■  9 1  ) 

8 

2.7 

17, '■37 

(2.  1) 

(26,752) 

12 

2.6 

5,556 

(2.0) 

(7,  ;i7) 

39 

2.0 

12, C77 

(1.7) 

(19, --33) 

13 

1.8 
(1.7) 

2 
(5 

c7  8 
517) 

1.8 
(1.6) 

10 
(17 

230 
•33) 

2.2 

(1.5) 

1 
(5 

■;01 

■^50) 

1.  1 
(1.1) 

13 

20 

(93 
511) 

0.8 
(1.0) 

1 
(1  1 

533 
rj2) 

1  .2 
(1.0) 

CI? 

v92 
202) 

18 


11 


13 


Courcr-:  1  n.'ur.irice      r,'.-r  y  i'.  rr,    Cff. -■;-.,    J^'(75    rrudu'-t    L.ilnlity 

C)os'-d    Cl.ilm    ^'Urvey,       Pr  ■;■)  i  i',  1  n  .r  y      nn:.ly-,i-;      t.|        'i"!}^''/.      ^"•'■J-' L'-l ' 
Decoii'ber    19'/'i. 


V-73 


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V-75 


Table  V-22.  — Distr  ibution  of  Product  Liabil ity  Claims 
by  Injured  Party ' s  Status  in  Occurrence 
(Untrended  and  Trended) 
(Trended  Values  are  in  Parentheses) 


Status  of  Injured  Party 


Percent  of 

Claims  with 

Payment 

Bodily  Injury 


Percent 
of  Total 
Payment 


Average 
of  Non- 
Zero 
Payments 


Employee  -  Injured  in 

Course  of  Employment 
Purchaser  of  Product 

Non-Purchaser,  Used  or 

Consumer 
Other 

Total  Distribution 

Number  of  Claims  with  Payment 


Employee  -  Injured  in 

Course  of  Employment 
Purchaser  of  Product 

Non-Purchaser,  User  or 

Consumer 
Other 

Total  Distribution 

Number  of  Claims  with  Payment 


i48.6% 

$   42,011 

11.1% 

(48.7) 

(128,684) 

25.7 

3,803 

6U.8 

(23.6) 

(10,677) 

1  9.1 

9,695 

19.2 

(23.2) 

(35,535) 

6.3 

12,215 

4.9 

(4.4) 

(26,  117) 
9,591 

100. 0% 

100.0% 

$  (29,312) 

2,937 





Property  Damage 

218 

Q.n% 

0.0% 

(282) 

58.5 

3,508 

80.2 

(50.6) 

(5,910) 

28.3 

13,290 

10.2 

(38.8) 

(35,463) 

13.2 

6,961 

9.  1 

(10.6) 

(10,902) 
4,809 

100.0% 

100.0% 

(9,364) 

1,583 





Source:   Insurance  Services  Office,  1976  Product  Liability  Closed 
Claim  Survey,  Preliminary  Analysis  of  Survey  Results;  December   1976. 


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c 

• 

•H 

TD 

01 

5: 

c 

c 

4-> 

-P  <c 

J-1  E 

to  O 

C  i- 

l-H  <^^ 


(D 


(D 

■o 


o 

c 


o 

CM 


o 


01 

o 
t. 

3 
O 
C/0 


D. 
Q 


V-^O 


Table  V-27.— 

Total  Property- Casualty  and  Mi  scellaneous 
Liabil ity  Premiums 
(bill  ions') 


1972 
1973 
1974 
1975 
1976 


Proper 

'ty 

Casual 

-ty 

$38. 

9 

42. 

0 

44. 

6 

49. 

5 

59. 

5 

M 

iscell 

aneous 

Liabi 

11 

ty 

$2. 

6 

2. 

7 

2. 

9 

3. 

8 

5. 

2 

(est. 

) 

Source 


Best's   Insurance   News   Digest,   Property/Casualty 


Edition,  Jan.  3,  1977 


Table  V-2 8. --Property- Casual ty  and  Mi  scellaneous 
Liabi 1 ity  Comb i ned  Loss  Ratios  A f ter  Div  idend s 


Year 


Property- 
Casualty 


Miscellaneous 
Liabil ity 


1972 

1973 
197  4 

1975 
1976 


96.2 

99.2 

105.4 

107.9 

102.8    (est.) 


114.7 
1  17.  1 
125.9 
116.5 
102.5    (est.) 


Source:         Best's      Insurance 
Edition,    Jan.    3,     1977. 


News      Digest),       Proper  ty/ Casual  ty 


V-81 


Table  V-29. — Loss  Ratios  and  Aggregate  Premiums ,  1 0  Leading  Writers 
of  Miscellaneous  Liabil ity  Insurance  and  Total  Industry 


lOCorn  p  a  nies 


All  Cornpan i e s 


Year 

1972 
1973 
197^ 
1975 
1976 


Loss 
Ratio 

89.6 
95.9 
97.5 
80.6 
71.2 


Incurred 

Losses 

(Mill  ions) 

$  912.5 
1 ,050.9 
1  ,139.0 
1 ,  168.0 
1 ,432.6 


Agg 

regate 

Premiums 

(Mi 

11  ions) 

$1 

,018. 

3 

1 

,095. 

8 

1 

,168. 

7 

1 

,449. 

6 

2,012.6 


Loss 
Ratio 

84.4 
86.5 
96.  1 
89.6 
78.6 


Aggregate 
Premiums 
(Mill  ions) 

$2,555 
2,701 
2,936 
3,824 
5,205 


Source:  Data  for  all  companies  from  Best's  Insurance  News 
Digest,  Property/Casualty  Edition,  January  3,  1977  Data  for  ten 
leading      companies      from    annual    reports   of   companies    listed    on    page 

V-29. 


Table  V-30. — Range  in  Loss  Ratios  for  10  Leadini 


Writers    of 

M 

iscellaneous    Lis 

lb 

ility    Insurance 

10 

Comp, 

anies 

1972 

70.6 

to 

126.5 

1973 

79.5 

to 

137.0 

1974 

70.3 

to 

144.0 

1975 

64.7 

to 

115.0 

1976 

63.2 

to 

87.9 

Source:   Annual  reports  of  companies  listed  on  page  F-1 . 


V-82 


Table  V-31. — Surplus  Line  Premiums  Reported  By 
Major  State  Insurance  Departments 


Top  j_0  States  (1975) 


1972 


Premiums  ($  million) 
1973      1974 


1975 


California 

38.4 

41.  1 

54.0 

78.  1 

New  York 

50.6 

44.3 

43.6 

72.2 

Texas 

30.9 

35.9 

48.5 

66.9 

Louisiana 

44.  1 

43.2 

44.9 

60.  1 

Florida 

15.3 

18.4 

20.8 

34.5 

Pennsylvan  ia 

12.2 

10.4 

16.4 

29.4 

Illinois 

21  .3 

25.9 

22.8 

27.9 

New  Jersey 

18.  1 

19.7 

18.  1 

24.8 

Michigan 

N.A. 

N.A. 

N.A. 

12.6 

Georgia 

5.9 

6.9 

8.8 

15.5 

All  other  states 

79.3 

97.7 

114.7 

290.8 

Total 


323.3 


348.6 


405.4 


612.8 


Percent  increase 
year  to  year 


72-73 
7.8X 


73-74 
16.3% 


74-75 
51.0% 


Source:   State  Insurance  Department  Annual  Reports. 


V-83 


Table  V-32. — Total  American  Reinsurance 


(in    millions) 

Primary 

Company    with 

Unl icensed 

Professional 

Alien 

Professional 

Reinsurance 

(foreign) 

Year 

Reinsurers 

Department 

Reinsurers 

Total 

I960 

$      385 

$      223 

$      462 

$1 ,070 

1965 

592 

392 

510 

1  ,494 

1970 

1  ,007 

598 

71M 

2,319 

1975 

2,321 

1  ,  102 

1,221 

4,644 

I960  to  1975  percent  increase  in  premium  volume  by  type  of 
reinsurer  . 


503% 


394% 


164% 


334% 


National  Underwriter  12/10/76  (pages  36  &  37). 


V-84 


Chapter  VI 

Major  Impacts  of 
Product  Liability 


MAJOR  IMPACTS  OF  PRODUCT  LIABILITY 


INTRODUCTION 

The  increase  in  product  liability  premiums,  as  well  as 
modifications  in  product  liability  law,  has  had  a  number  of 
impacts  on  those  who  produce,  distribute  or  sell  products.  It 
has  also  affected  persons  who  use  products  and  those  who  are 
injured  by  them.  We  have  discussed  a  number  of  those  impacts 
throughout  this  report;  however,  it  appeared  useful  to  synthesize 
our  information  in  one  chapter. 

Most  of  the  topics  addressed  here  were  analyzed  in  summary 
form  in  the  Task  Force's  Briefing  Report.  When  discussing  those 
subjects  we  will  refer  to  the  findings  of  the  Briefing  Report  and 
then  indicate  what  has  been  learned  to  either  qualify  or  support 
that  assertion  as  the  result  of  our  consideration  of  materials 
outlined  in  Chapter  I  at  p.  1-7  _et.  seq .  The  topics  discussed 
will  be:  availability  of  product  liability  insurance; 
af fordabil ity  of  product  liability  insurance;  product 
introduction  and  discontinuation;  business  failures;  trends  in 
the  number  of  product  liability  claims;  compensation  obtained  by 
persons  injured  by  products;  the  relationship  between  product 
liability  claims  and  product  accidents;  Worker  Compensation 
systems;  and  product  liability  loss  prevention. 

As  the  discussion  about  some  topics,  e.g.,  business  failures, 
will  show,  there  is  very  little  solid  information  available. 
Nevertheless,  we  have  decided  to  discuss  these  subjects  in  order 
to  abate  the  growing  amount  of  misinformation  that  has  been  set 
forth  about  product  liability. 

A  summary  of  our  major  findings  appears  at  the  end  of  this 
chapter . 


VI-1 


DISCUSSION  OF  THE  MAJOR  IMPACTS  OF  PRODUCT  LIABILITY 

Availability  of  Product  Liability  Insurance 

Introduction 

Several  definitions  of  unavailability,  as  it  applies  to 
product  liability  are  conceivable,  and  persons  may  differ  as  to 
which  one  is  correct.  The  following  working  defintion  appeared 
to  be  appropriate  for  the  purposes  of  this  report.  Product 
liability  insurance  is  unavailable  to  a  firm  when,  after  a 
thorough  search  of  the  insurance  market,  that  firm  is  unable  to 
obtain  a  quotation  for  products  coverage  which  effects  a 
reasonable  transfer  of  risk  from  the  insured  to  the  insurer.  To 
the  extent  the  firm  is  unable  to  obtain  coverage  which  it 
considers  to  be  adequate,  there  may  be  partial  unavailability. 

The  Task  Force's  Briefing  Report  found  that  only  a  few 
companies  have  been  unable  to  obtain  product  liability  insurance. 
The  report  noted  that  the  problem  "appears  to  be  more  one  of 
af fordabil ity ,  than  availability."  Briefing  Report  at  p.  6. 
Nevertheless,  sources,  both  before  and  after  tHe~~plfb^i c a t i o n  of 
the  Briefing  Report,  have  asserted  that  product  liability 
insurance  is  widely  unavailable.  They  have  not  been  able  to 
document    these    assertions. 

We  find  that  the  situation  does  not  appear  to  have  changed 
since  the  time  of  the  Briefing  Report--there  still  is  no  evidence 
of  a  widespread  problem  of  product  liability  insurance  being 
unavailable.  A  review  of  the  findings  of  our  industrial  and 
insurance  contractors,  industry  association  surveys,  and  reports 
of  state  insurance  commissioners  supports  this  assertion  and 
develops    the    nuances   of   this    finding. 

In   that  regard,  the  product  liability  situation  would  appear 

to  be  different  from  that  of  medical  malpractice  in  that   product 

liability    insurers  are   not   leaving   the   market   altogether. 

Surveys  suggest  that  many  companies  are  willing  to  write   product 

liability   insurance  .    Still,   some   companies   in   our   target 
industries  and   in   other   high-risk   product   lines   are   having 

difficulty  obtaining  insurance. 


VI-2 


It  is  difficult  to  draw  a  precise  picture  of  the  nature  and 
extent  of  these  "pockets"  of  unavailability.  There  are  three 
reasons  for  this.  First,  it  is  not  always  clear  whether  a 
potential  insured  made  a  thorough  search  of  all  sources  before 
concluding  that  product  liability  insurance  was  unavailable. 
Second,  some  companies  reporting  unavailability  problems  may  have 
bad  claims  records  and  may  be  producing  unreasonably  unsafe 
products.  The  Task  Force  has  concluded  that  unavailability  of 
insurance  to  companies  of  this  type  should  not  be  considered  part 
of  a  legitimate  availability  problem.  Finally,  some  reported 
availability  problems  may  really  be  af fordabil ity  difficulties: 
the  company  may  in  fact  be  able  to  transfer  product  liability 
risks  onto  an  insurer.  For  example,  some  firms  whose  product 
liability  premiums  have  increased  by  several  hundred  percent  in 
one  year  may  assert  (when  polled  in  surveys)  that  such  insurance 
is  "unavailable."  We  would  note  that  at  some  point  problems  of 
af fordabil ity  and  availability  merge.  We  discuss  this  issue  in 
the    next    section    of   this   chapter. 

Moreover,  unavailability  of  product  liability  insurance  can 
also  arise  in  a  "partial"  sense.  This  occurs  when  insurers 
impose  limits  on  amounts  of  coverage,  require  large  deductibles, 
or  otherwise  restrict  products  coverage.  We  will  discuss  limited 
or  partial  unavailability  in  this  section  and  set  forth  our 
conclusions   on       pp.    VI-52    -    53.  Thus,      the      discussion      that 

follows         is        divided         into         two        major         parts:         (1)       total 
unavailability,    and    (2)    partial    unavailability. 

Total    Unavailability:      Analysis 

Insurance  Study .  --The  Insurance  Study  concluded  that  the 
availability  problem--though  not  insignif ican t--was  not  severe  as 
of  December  1976.  See  Insurance  Study  at  3-1M.  The  contractor 
found,  however,  that  some  manufacturers  in  each  of  the  Task 
Force's  target  industries  (with  the  exception  of  grinding  wheels 
and  aircraft  components)  were  having  difficulty  obtaining 
coverage.  Manufacturers  of  heavy  industrial  machinery  were 
experiencing  the  most  serious  problems  while  firms  in  the 
grinding  wheel  and  aircraft  components  industries  apparently  were 
having  no  problem  obtaining  products  coverage.  See  Insurance 
Study   at    ES-6,    3-3. 


VI-3 


^ 


The  insurance  contractor  found  it  difficult,  however,  to 
obtain  data  concerning  specific  instances  in  which  companies  were 
unable  to  obtain  products  coverage  .  The  interviews  with 
underwriters  and  brokers  did  show  that  insurance  companies  are 
providing  products  coverage  on  a  "very  selective  basis"  for 
certain    categories   of   products    . 

In  an  effort  to  gain  a  better  understanding  of  the 
availability  of  products  coverage,  our  insurance  contractor 
analyzed  information  compiled  by  the  Task  Force  staff  regarding 
firms  which  claimed  that  they  had  been  unable  to  obtain  product 
liability  insurance.  These  companies  included  firms  that  (1) 
responded  to  the  Industry  Study's  telephone  survey  by  October  20, 
1976,  (2)  responded  to  the  RETORT  Survey  (for  a  description  of 
RETORT,  see  Jd^.  at  3-1,  3-8),  or  (3)  contacted  the  Department  of 
Commerce,  the  Task  Force,  or  the  Senate  Select  Small  Business 
Committee    directly. 

On  the  basis  of  this  information,  the  insurance  contractor 
identified  62  companies  by  name  that  did  not  have  products 
coverage  because  it  was  alleged  to  be  either  unavailable  or  too 
expensive    . 

Industry  S_tud_y . --Approx  imately  86%  of  the  firms  in  the 
Industry  Study's  telephone  survey  indicated  that  they  carried 
some  form  of  product  liability  coverage.  The  propensity  to  carry 
products    coverage   varied    directly    with    firm    size    as    follows: 

Firm    Size    in    Sales  Percentage   of   Firms 
(  Millions) with    Coverage 

L ess    t h a n    $2 . 5 
$2T5^o"TlW^^ 
$100    and    over 


Source:       Industry    Study,    Table    IV-6    at    IV-25 

Of  those  firms  that  did  not  carry  products  coverage,  only 
four  indicated  that  they  could  not  obtain  coverage  at  any  cost. 
One    firm    indicated    that    its    previous    coverage    had    been    cancelled, 


71 

.3 

87 

.4 

97 

.3 

VI-U 


and  nineteen  firms  indicated  that  products  coverage  was  too 
expensive.  XI  • '  Table  IV-7  at  IV-26.  No  further  information  was 
available  as  to  why  the  four  firms  were  unable  to  obtain 
coverage,  how  hard  they  had  searched,  or  what  their  claims 
experience  had  been.  Nor  did  the  survey  show  what  premium  levels 
were   considered    by    the    respondents    to    be    too    expensive. 

Industry  Association  Surveys. --Several  industry  associations 
collected  information  regarding  the  availability  of  product 
liability  insurance  to  their  members.  Some  that  provided 
detailed  information  on  the  question  of  availability  were  the 
National  Federation  of  Independent  Business  ("NFIB"),  the 
National  Machine  Tool  Builders  Association  ("NMTBA"),  the  Farm 
Equipment  Manufacturers  Association  ("FEMA"),  and  the  Machine  and 
Allied    Products    Institute    ("MAPI"). 

The  NFIB  conducted  a  survey  of  its  small  manufacturer 
members.  Of  the  ^,214  questionnaires  mailed,  1,296  responses 
(30.8  percent)  were  received.  Many  of  the  survey's  questions 
concerned    the    availability   of   product    liability    insurance. 

The  NFIB  Survey  found  that  approximately  587o  of  the  small 
manufacturers  surveyed  carried  some  form  of  product  liability 
coverage  .  It  was  found  that  the  larger  the  firm  (in  terms  of 
gross  sales),  the  greater  the  firm's  propensity  to  carry  products 
coverage  .  This  finding  was  in  accord  with  the  results  of  the 
Industry    Study's    survey. 


Those      firms      which      did    not   carry    products    coverage   gave    the 
following    reasons: 


Response 


Percentage  of  Firms 

without  Products 
Coverage 


"Don't  Need  Any" 
"No  Insurer  will 

Carry  me" 
"Premiums  too  High" 
"Never  Considered  It" 
"Self-Insured" 
"Other" 
"N/A" 


38.9 


2 

20 
27 
2, 

3. 
6 


Source:   NFIB  January  1977  Survey,  Table  3,  at  4 


VI-5 


As  this  table  shows,  only  2.1  percent  of  the  firms  without 
products  coverage  indicated  a  direct  availability  problem.  One- 
fifth  of  the  firms  without  coverage  (8.5  percent  of  all  firms 
surveyed)  stated  that  they  could  not  afford  the  level  of  products 
coverage  desired.  Some  15.6%  of  the  entire  survey  sample  stated 
that  they  did  not  need  products  coverage,  and  another  10%  of  the 
firms  surveyed  stated  that  they  had  never  considered  carrying 
products  coverage. 

Surveys  completed  by  both  the  NMTBA  and  the  FEMA  indicate 
that  some  of  their  members  had  difficulty  obtaining  product 
liability  insurance  in  1976.  An  unspecified  number  of  NMTBA 
members  reported  that  they  were  operating  without  products 
coverage  in  1976.  Furthermore,  firms  in  both  associations  were 
notified  in  1976  that  their  products  coverage  was  going  to  be 
cancelled  .  The  surveys  did  not  determine  whether  firms  whose 
products  coverage  was  cancelled  were  subsequently  able  to  obtain 
coverage  from  another  insurance  carrier. 

The  MAPI  1976  Survey  did  not  report  any  cases  of 
unavailability  among  those  who  responded  to  its  questionnaire. 

State  Insurance  Commissioners . — State  insurance  commissioners 
from  Massachusetts,  Michigan,  New  York,  Pennsylvania,  and 
Virginia  met  with  the  Task  Force  staff  on  November  11,  1976,  to 
discuss,  in  part,  the  unavailability  of  product  liability 
insurance.  Several  of  the  commissioners  reported  that  they  had 
received  a  few  complaints  (10-30  in  number)  regarding  products 
coverage  but  that  those  complaints  focused  upon  the  cost  of 
coverage  rather  than  its  availability.  None  of  the  commissioners 
believed  that  there  was  an  availability  problem  for  products 
coverage  in  his  state. 

As  a  follow-up  to  that  meeting,  the  insurance  contractor 
requested  the  state  insurance  departments  of  California, 
Louisiana,  Illinois,  New  York,  Pennsylvania,  and  Texas  to  compile 
data  on  complaints  they  had  received  regarding  product  liability 
insurance.  The  consensus  was  that  there  was  no  severe 
availability  problem  at  that  time  . 

In  June  1977,  the  state  insurance  commissioners,  acting 
through  the  National  Association  of  Insurance  Commissioners   (the 


VI-6 


"NAIC"),  concluded  that  there  was  no  evidence  of  a  "widespread 
availability  problem"  for  product  liability  insurance  .  Based 
on   its   study   of  product  liability,  the  NAIC  has  concluded  that 

the   availability   problem  _  is both___shor-t^=^tBrm aiixl____ljjmited 

es"5entially  to  small  manuf ac.turieiLS 

In  order  to  meet  this  limited  unavailability  problem, 
insurance  commissioners  in  at  least  21  states  have  encouraged  the  ^ 
formation  of  voluntary  market  assistance  programs  within  their  I'Ar^ 
states  to  provide  product  liability  insurance  to  companies  that 
have  found  such  insurance  to  be  unavailable  .  These  programs, 
which  were  endorsed  by  the  NAIC  as  the  appropriate  solution  to 
the  limited  availability  problem  it  identified,  do  not  address 
problems  of  a f fordabil ity 

Correspondence  Received  by  the  Task  Force . --As  indicated  in 
the  Task  Force's  Briefing  Report  of  January  4,  1977, 
correspondence  received  by  the  Task  Force  prior  to  the 
publication  of  that  report  did  not  indicate  that  there  was  a 
serious  availability  problem  with  respect  to  product  liability 
insurance  .  From  January  Mth  until  September  7,  1977,  the  Task 
Force  received  only  a  few  letters  indicating  that  a  particular 
company  had  an  availability  problem.  It  should  be  noted  that 
after  its  placement  of  a  notice  in  the  Federal  Register  in 
September  1976,  the  Task  Force  did  not  actively  solicit 
information  on  this  particular  issue. 

Product  Liabil ity  Advisory  Committee  to  the  Under  Secretary 
of  Commerce . — Most  members  of  the  Product  Liability  Advisory 
Committee  to  the  Under  Secretary  of  Commerce  concurred  with  the 
Briefing  Report's  conclusion  regarding  the  availability 
problem 

Partial  Unavailability 

Def in  ition . — Partial  unavailability  of  product  liability 
insurance  can  occur  if  insurers  restrict  policy  limits,  raise 
deductibles  or  restrict  coverages  on  certain  products.  These 
limitations  can  force  an  insured  to  retain  a  risk  that  he  wishes 
to  transfer  to  the  insurance  system. 


VI-7 


Pol  icy  Limitations . — Policy  limitations  are  the  maximum 
dollar  amounts  of  the  insurance  company's  liability  with  respect 
to  a  particular  policy.  There  are  limits  on  the  insurer's 
liability  for  each  occurrence  and  for  a  total  policy  year.  The 
latter  are  called  annual  aggregate  limits  p.  V-5. 

Policy  limits  that  insurance  companies  have  been  willing  to 
offer  for  products  coverage  do  not  appear  to  have  changed 
significantly  since  1971.  The  Industry  Study's  telephone  survey 
showed  that  the  average  policy  limits  carried  by  the  respondents 
remained  relatively  constant  from  1971  through  1976  for  all  three 


firm   size   groups 


The   data   from   the    various    industry 


association   surveys   analyzed  by  the  industry  contractor  were  in 
accord  with  that  finding 

Thus,  insurance  companies  do  not  seem  to  be  forcing  insureds 
to  retain  more  risk  than  they  wish  by  reducing  the  amount  of 
coverage  that  they  are  willing  to  make  available. 

On  the  other  hand,  the  Insurance  Study  found  that  insurance 
underwriters  are  reluctant  to  increase  the  limits  of  liability 
for  existing  policies  .  Thus,  some  manufacturers,  whose 
products'  risk  exposure  appears  to  be  increasing  (due  to  trends 
in  product  liability  law,  increases  in  sales,  new  product 
introduction,  or  simply  inflation)  may  be  unable  to  protect 
themselves  against  that  increased  risk  exposure  by  raising  the 
limits  of  their  products  coverage.  Therefore,  the  ratio  of  risk 
to  available  coverage  may  actually  be  increasing  for  these  firms. 

Information  available  to  the  Task  Force  is  conflicting  as  to 
whether  companies  are  satisfied  with  the  policy  limits  available 
to  them.  An  individual  representing  large  insurance  brokerage 
firms  on  the  Product  Liability  Advisory  Committee  to  the  Under 
Secretary  of  Commerce  emphasized  that  many  companies  have  been 
unable  to  obtain  what  they  consider  to  be  adequate  coverage  at  an 
affordable  price  .  In  addition,  several  companies  have  written 
to  the  Task  Force  indicating  that,  although  they  do  have  products 
coverage,  their  policy  limits  are  inadequate  with  respect  to 
their  exposure 


VI-8 


On  the  other  hand,  the  MAPI  Survey  indicated  that  most  of  its 
member  companies  are  satisfied  with  policy  limits  available  to 
them 

Coverage  Restrictions . — Coverage  restrictions  occur  when 
insurers  limit  coverage  to  products  currently  produced,  or  limit 
the  amount  that  will  be  expended  on  defense  costs.  Of  course,  a 
restriction  also  occurs  when  an  insurer  excludes  some  of  a 
manufacturer's  products  from  overall  coverage.  Task  Force 
information  sources  were  not  wholly  in  accord  on  the  question  of 
whether  coverage  restrictions  were  increasing. 

On  one  hand,  a  state  insurance  department  study  in  Kansas 
found  no  significant  underwriting  changes  or  market  restrictions 
affecting  products  coverage  .  In  addition,  the  Insurance  Study 
concluded  that  coverage  exclusions  are  rarely  imposed  by 
insurance  companies.  It  based  this  finding  on  its  survey  of 
3,000  underwriting  files  which  revealed  only  four  instances  in 
which  snecific  products  were  excluded  from  the  overall  products 
coverage  .  The  Insurance  Study  did  find,  however,  that  there 
are  certain  product  categories  which  are  underwritten  only  after 
careful  scrutiny  of  the  individual  risk 

On  the  other  hand,  the  Ind^us.tx-y^  .Study  found  restrictions  on 
products  coverage  to  be  more  prevalent.  Approximately  10  percent 
of  the  firms  surveyed  in  its  telephone  survey  reported  that 
specific  products  were  excluded  from  their  products  coverage. 
Another  9.5%  of  the  firms  surveyed  reported  other  types  of 
restrictions,  such  as  the  exclusion  of  new  products  or  the 
inclusion  of  defense  costs  within  the  policy  limits 


/^ 


I 


The  1977  Hearings  conducted  by  the  Subcommittee  on  Capital, 
Investment  and  Business  Opportunities  of  the  House  Small  Business 
Committee  produced  somewhat  mixed  results.  The  Hartford 
Insurance  Group  and  the  Liberty  Mutual  Insurance  Company 
indicated  that  their  companies  do  not  automatically  exclude  any 
individual  product  categories  from  coverage.  In  contrast,  the 
St.  Paul  Fire  and  Marine  Insurance  Company  does  not  provide 
coverage  for  completed  aircraft  engines,  fireworks,  fuses  or 
explosive  devices.  Crum  and  Foster,  Inc.,  a  relatively  small 
writer  of  product  liability  insurance,  excludes  aircraft 
products,  pharmaceuticals,  explosives  and  cosmetics 


VI-9 


Deductibles . --A  deductible  is  that  amount  which  the  insured 
agrees  to  pay  in  the  event  of  a  claim  and  which  must  be  exceeded 
before    the    insurer    will    provide    coverage.      See    p.    V-6 .    V,    p.    5. 

The  Insurance  Study  found  that  only  3%  of  the  3,000 
underwriting  files  contained  deductibles.  Insurance  Study  at  1- 
15.  Fifty-nine  percent  of  the  deductibles  reviewed  were  below 
$1,000  per  occurrence,  while  31%  were  over  $25,000  per 
occurrence .       Id . 


Similarly,  the  Hartford  Insurance  Group  and  Liberty  Mutual 
Insurance  Company  have  both  stated  that  deductibles  are  contained 
in  less  than  1%  of  their  products  policies  .  The  Hartford 
Insurance  Group  evidently  prefers  to  write  full  products 
coverage.  This  allows  the  company  to  retain  complete  control 
over  claims  and  to  better  detect  any  increases  in  the  frequency 
of  small  calims.  Hartford  indicated  further  that  deductibles  are 
used  only  in  large  national  accounts  which  desire  to  retain  some 
of  their  products  risk  but  also  want  Hartford's  claim  and  loss 
control         services,         together         with        catastrophic  coverage. 

Deductibles  for  these  accounts  range  between  $50,000  and 
$1,000,000.  Liberty  Mutual  Insurance  Company  indicated  that  the 
few  deductibles  in  their  CGL  policies  (only  1%)  serve  to  exclude 
nuisance  claims  from  the  coverage.  Its  deductibles  typically 
range    in    size    between    $100    and    $250 

/  The      NMTBA      Survey    found    that   deductibles    were   more    prevalent 

\     in    the    product    liability      coverage      of      the      firms      it      surveyed. 

j    Twenty-three      percent      of      the      60    responding    firms    reported    that 

(  they  had  deductibles   in   their   1976   product   coverage   .    The 

percentage      was      much      higher      for    the    15   metal-forming    companies 

responding    to    the    survey;    40%    of   those    companies    had      deductibles 

in    1976       . 


The   NMTBA   Survey   also  found  that  the  average  size  of  those 

deductibles  increased  significantly  between   1975   and   1976   for 

both   groups.    The   average   deductibles   in   1976   for   all   60 

responding  firms  was  $41,000,  an  increase  of  52   percent   in   one 

30a 
y^s""-  The      average      deductible      for      the      15      metal-forming 

companies  was  $65,000,  an  increase  of  63  percent  from  the  average 

1975    level. ^ 


VI-10 


Similarly,  the  Industry  Study  found  that  deductibles  were  a 
more  significant  factor  with  regard  to  availability  than  the 
Insurance  Study  indicated.  Specifically,  it  reported  that  41%  of 
the  firms  surveyed  had  some  form  of  deductible  in  their  products 
coverage.  This  represented  a  sharp  increase  in  the  frequency  of 
deductibles  since  1975  .  This  finding  is  also  in  accord  with 
the  finding  of  the  MAPI  Survey  that  38%  of  the  firms  surveyed 
were  required  to  accept  a  deductible  or  retrospective 
retention 

The  Industry  Study  also  found  that  the  levels  of  deductibles 
(combined  PD  and  BI)  have  increased  significantly  between  1975 
and  1976  for  both  large  firms  (a  6^%  increase  to  an  average  of 
$335,000  in  1976)  and  medium-size  firms  (a  258%  increase  to  an 
average  of  $120,000).  Industry  Study,  Table  IV-15  at  IV-37.  The 
average  deductible  for  the  eight  small  firms  reporting  for  1976 
decreased  17%  to  $7,400.  _Id.;  or  see  Chapter  III  of  this  report, 
Table    III-9. 

As  with  policy  exclusions,  it  would  appear  that,  while 
deductibles  are  not  generally  imposed  on  products  coverage,  they 
are  becoming  more  prevalent  among  firms  in  the  target  industries. 
Deductibles  are  also  increasing  significantly  in  size  for  medium- 
and  large-size  firms,  but  this  may  be  a  matter  of  choice,  not 
necessity,    on    the    part   of   the    individual    company. 

Af fordabil ity   of    Product    Liability    Insurance 

Introduction 

The      Task      Force's      Briefing      Report      found    that. in    the    years 

1974-1976,        product        liability  insurance  premiLrms  rose 

substantially      in      most      target      industries.  Among    those   most 

severely        affected         were        industrial        machinery,         industrial 

chemicals,      and    high-risk   consumer    goods    such   as    pharmaceuticals, 

automotive    parts    and   medical    devices.      Anecdotal      data      showed.. a 

i  ja 
similar      impact      on      sporting      goods    and    ladder   manufacturers. 

This      conclusion      was      based      on      early      evaluations        of        draft 

contractor      reports.         As      our      discussion      will      show,    the    final 

drafts   of  our    contractor    reports    and    new   data    that      were      brought 

to      the      attention      of      the      Task    Force    confirm    and    amplify   these 

find  ings . 


VI-1  1 


This  area,  as  is  the  case  with  others  discussed  in  this 
chapter,  does  have  its  share  of  misinformation.  Many  firms  which 
no  longer  carry  product  liability  insurance  assert  that  they  are 
unable  to  "afford  it"  because  of  higher  premiums.  If  these  firms 
are  correct  in  their  analysis,  it  is  a  significant  matter.  These 
situations  of  un af fordab il ity  are  the  practical  equivalent  of  a 
product  liability  availability  problem.  On  the  other  hand, 
policymakers  should  not  accept  ipse  dixit  assertions  of 
unaf fordabil ity . 

It  is  extremely  difficult  to  determine  whether  increases  in 
product  liability  premiums  have  made  coverage  unaffordable  for  a 
particular  firm.  That  difficulty  stems  from  the  fact  that 
af fordabil ity  is  a  relative  concept.  Each  evaluation  of 
a f fordabil ity  is  tied  to  the  specific  circumstances  of  the  firm 
(or  industry)  being  considered  and  requires  a  complex  economic 
analysis  of  those  circumstances.  Such  an  analysis  would  seek  to 
determine  the  price  elasticity  of  demand  for  the  particular 
firm's  product  in  order  to  determine  whether  the  increase  in 
insurance  premiums  can  be  passed  on  to  the  purchaser  of  the 
product  in  the  f^orm  of  higher  prices,  or  whether  it  must  be 
absorbed  by  the  firm  .  Ultimately,  the  analysis  would  attempt 
to  ascertain  the  impact  of  the  premium  increase  upon  the  firm's 
(or  industry's)  ability  to  earn  a  satisfactory  rate  of  return  on 
invested    capital.       See    also    p.    VII-19. 

Unfortunately,  such  vigorous  analyses  of  af fordabil ity-- 
though  theoretically  correct--were  not  practicable.  Therefore, 
the  Task  Force  has  relied  upon  other  indicia  of  af fordabil ity . 
These  indicia  include  examining  the  percentage  increase  in 
product  liability  rates  and  premiums  over  time  and  the  ratio  of 
current  premiums  to  sales  (expressed  as  a  percentage)  for  the 
target    industries. 

While  these  indicia  provide  a  practicable  method  for 
analyzing  af fordabil ity ,  neither  is  a  wholly  satsfactory  index 
which  can  consistently  distinguish  instances  in  which  product 
liability  premiums  are  unaffordable.  Thus,  an  increase  in  a 
firm's  product  liability  insurance  premium  of  several  hundred 
percent  in  one  year  may  not  be  unaffordable  if  the  previous 
year's  premium  was  less  than  a  tenth  of  a  percent  of  sales.  On 
the    other    hand,    an    increase    in    the    ratio    of      current      premium      to 


VI-12 


sales  (expressed  as  a  percentage)  from  0.1%  to  0. 35%  may  be 
unaffordable  to  a  firm  which  cannot  pass  on  increased  costs  and 
which  has  a  net  profit  margin  of  1.0%  of  sales.  The  increase  in 
premium    to    0.35%    of   sales   could      be      unaffordable      if      that 


cannot      withstand    a    reduction    of   pre-tax    profits   by   one-fourth 


f^m 


Any  conclusions  about  the  af fordabil ity  of  products  coverage 
are  necessarily  subject  to  the  limitations  inherent  in  these 
measures . 

The  discussion  of  the  af fordabil ity  of  product  liability 
insurance  will  examine  the  following  areas: 

•  the  increase  in  product  liability  insurance  rates; 

•  the  increase  in  product  liability  insurance  premiums; 

X>»     the   impact   of  product  liability  premium  increases  upon 
small  firms;  and 

•  the   impact   of   the   cost  of  product  liability  upon  the 
cost  of  products. 

Product  Liability  Insurance  Rates 

36 
Product   liability   insurance  rates  for  both  manually-rated 

and  rated  product  categories  have  increased  sharply   during   1975 

and   1976.    According   to   the  Insurance  Study,  increases  in  the 

rates  for  the  target  product  categories  varied  in   the   range   of 

from  100%  to  500%  during  the  first  11  months  of  1976  and  prior  to 

the  December  1976  increase   in   ISO   rates,   which   is   discussed 

below.    See   Insurance   Study   at   ES-4.    Rate   changes  for  all 

product  categories  varied  from  slight  decreases  for  products  with 

favorable  loss  experience  to  increases  of  more  than  900%.   ^.  at 

2-1 ,  2-13  -  2-21 . 

Until  1975,  there  had  been  no  increase  in  the  ISO  basic  limit 
manual  rates  since  1963-  _I^.  at  2-13.  The  ISO  increased  limits 
factors  for  manual  rates  had  not  changed  since  1955.  _Id_.  Both 
were  increased  in  1975  and  1976.  The  average  cumulative  increase 
in  the  basic  limits  manual  rates  for  bodily  injury  has  been  83 
percent,  ranging  from  slight  decreases   to   an   increase   of   660 


VI-1  3 


percent  in  one  product  category.  ^.  at  ES-4.  The  average 
standard  increased  limits  factor  for  manual  rates  increased  200 
percent.  _Id^.  at  2-14.  Many  products  received  substantial 
increases  such  as  the  more  than  400%  increase  reported  for 
household  electrical  equipment  and  the  550%  increase  for  tools, 
dies,  and  j  igs  .   Id  . 

At  the  time  the  Insurance  Study  was  completed,  rated  product 
categories  had  not  received  a  formal  rate  increase  since  1974. 
Id .  at  2-16.  The  insurance  contractor,  however,  found  that  rate 
increases  for  rated  products  had  been  implemented  by  insurance 
companies  since  then  on  a  case-by-case  basis  and  that  these 
increases  generally  have  been  greater  than  the  ISO  manual  rate 
increases  described  above.  Id^.  at  ES-4 ,  2-16.  The  Insurance 
Study,  in  its  underwriting  file  survey,  found  that  the  target 
product  categories  had  "experienced  average  rate  increases 
ranging  from  a  low  of  19%  to  a  high  of  568%"  since  1974.  16_.  at 
2-20.  For  all  other  rated  products,  the  average  increase  was 
251%.      2^.    (See    caveats    to    these    findings.       Id . ) 

Furthermore,  the  Insurance  Study  found  that  the  average  rate 
increases  between  1974  and  1976  were  much  greater  for 
manufacturers  as  a  group  (320%)  than  for  wholesalers  (29%)  or 
retailers  (39%).  Also,  rate  increases  were  greater  for  large 
firms  and  medium-size  firms  than  for  small  firms.  During  that 
period  the  average  increase  for  companies  with  over  $2.5  million 
in  sales  in  1975  was  510%  versus  a  39%  increase  for  firms  with 
under    $2.5   million    in    sales.      ^.    at    2-21. 

These  findings  should  be  viewed  with  caution.  Since  the 
firms  in  the  sample  were  not  stratified  by  product  category  or 
type  of  business,  the  size  of  firms  may  be  related  to  the  nature 
of  the  business,  e.g.,  the  larger  firms  may  be  predominantly 
manufacturers  while  the  small  firms  may  be  predominantly 
retailers  and  wholesalers.  Further,  we  cannot  determine  whether 
these  findings  are  consistent  with  the  Industry  Study  where  only 
manufacturing    firms    were    included. 

The  insurance  contractor  also  estimated  the  ratio  of  the  then 
current  product  liability  rates  to  sales  (expressed  as  a 
percentage)  for  the  target  categories.  As  with  all  of  the  above 
data,    it    is    important    to      remember      that      these       figures      do      not 


VI-14 


reflect  the  application  of  experience  or  schedule  modifications; 
nor  do  they  include  data  from  policies  which  are  composite  rated, 
loss  rated,  or  rated  retrospectively.   _I1-  ^^  2-20,  2-23. 

Applying  basic  limits  rates  and  increased  factors  up  to  a 
limit  of  liability  of  $500,000  for  both  bodily  injury  and 
property  damage,  in  accordance  with  industry  practices,  the 
insurance  contractor  estimated  that  the  ratio  of  product 
liability  rates  in  effect  in  1976  to  sales  for  the  target 
industries  ranged  from  .06%  up  to  3.12%.  ld_.  ,  Exhibit  C-2  at  2- 
25  -  27.  The  Insurance  Study  found  that  ^8%  of  the  product 
classifications  within  the  target  industries  (limited  to  those 
rated  by  sales  exposure  in  dollars)  have  rates  which  were  less 
than  1%  of  sales,  while  only  approximately  6.0%  were  above  3% 
range.  The  distribution  of  rates  as  a  percentage  of  sales  was  as 
fol lows : 

Applied  Rates  as  a  Percentage  of  Sales  for 
Target  Product  Categories 


Number  of 

Product 

Percentage 

Categories 

Distribution 

Rates  less  than 

0.5%  of  sales 

15.0 

31.3 

0.5%  to  1 .0% 

8.0 

16.7 

1%  to  2% 

17.0 

35.4 

2%  to  3% 

5.0 

10.4 

Over  3% 

3.0 

6.2 

Total 


48.0 


100.0% 


Source:       Insurance    Study,    Exhibit    C-1    at    2-24. 

In  December  1976,  ISO  formally  revised  the  basic  limits  rates 
for  rated  product  categories  for  the  first  time  since  1974. 
Rates  for  a  significant  number  of  rated  product  categories  were 
increased  more  than  100%.  Some  of  the  rated  product  categories 
experiencing  rate  increases  of  100%  or  more  are  listed  in  Exhibit 
V-4    in    Chapter    V  of   this    report. 


VI-15 


This  ISO  rate  revision  occurred  after  the  Insurance  Study  was 
completed,  and  it  is  not  clear  how  the  revision  affects  that 
study's  findings.  As  was  noted  above,  the  insurance  contractor 
observed  in  its  underwriting  file  review  that  most  insurance 
companies  had  already  implemented  substantial  rate  increases  on  a 
case-by-case  basis  with  respect  to  rated  products  since  the  last 
formal  rate  revision  in  197^.  Insurance  Study  at  ES-4,  2-16  - 
17.  The  December  1976  increases  may  have  resulted  in  further 
increases  in  some  cases  and  merely  formalized  de  facto  increases 
in    others. 

In  addition,  it  is  important  to  recall  that  the  rates  for 
rated  product  categories  are  intended  only  to  be  guides  to 
underwriters.  Again,  the  Insurance  Study  found  that  underwriters 
increased  their  implicit  rates  above  those  "guides"  sharply  when 
applying  the  197^  rates  during  the  period  between  1974  and  1976. 
Id .  It  is  uncertain  whether  underwriters  will  apply  the  (A) 
rates  as  revised  by  the  December  1976  filing,  or  whether  they 
will  continue  to  modify  them  when  applying  them  to  specific 
underwriting  situations. 

Some  of  the  product  categories  with  rates  exceeding  ^%  of 
sales  following  the  December  1976  revision  are: 

•  Abrasive  wheels  (1.18%) 

•  Automotive  manufacturers  (1.11  to  2.81%) 

•  Construction,  mining,  and  material  handling 
equipment  (3.3%) 

•  Farm  machinery  and  equipment  (.92%  to  4.04%) 

•  Ladders  (12.89%  to  23-55%) 

•  Industrial  machinery  and  equipment  (2.0%  to  7-3%) 

•  Machinery  (5.3) 

The  level  of  coverage  assumed  in  Exhibit  V-6  in  Chapter  V, 
and  discussed  above,  is  substantially  below  the  $500,000  level 
for  bodily  injury  and  property  damage  which  was  found  by  the 
insurance  contractor  to  be  the  most  frequently  used  and  which  it 
incorporated  in  its  analysis  .  Insurance  Study  at  2-23;  Chapter 
VI,  p.  15.  To  the  extent  that  companies  carry  higher  policy 
limits  than  the  limits  assumed  in  either  of  these  analyses,  the 
cost  of  their  products  coverage  will  be  a  greater  percentage  of 
sal es . 


VI-16 


Product   Liability    Premiums 

Introduction. — Data  on  product  liability  rate  increases  may 
not  indicate  changes  in  the  premiums  actually  being  paid  by 
companies  for  several  reasons.  First,  according  to  ISO,  manually 
rated  policies  represent  only  10%  of  the  total  product  liability 
exposure.      See    p.    V-20;    Insurance    Study    at    2-9. 

Second,  both  inflation  and  real  growth  in  a  company's  sales 
may  cause  its  product  liability  insurance  premiums  for  a  fixed 
amount  of  coverage  to  increase  --  even  while  product  liability 
insurance  rates  remain  constant.  This  is  because  product 
liability  insurance  rates  are  stated  in  terms  of  the  level  of/ 
sales  of  a    firm. 

Third,        as      the      Insurance      Study      emphasizes,      underwriting 

decisions      are      extremely      subjective.         The      product        liability 

premiums        charged         by      insurance      companies      can      and      do      vary 

substantially    from    the      ISO     manual      and      guide      rates      for      many 

reasons,      including:      the      level      of      risk   exposure,    the    level    of 

deductible      accepted,      the      limits      of      liability      required,      the 

product      mix      of      the      insured,    the    application    of   experience    and 

schedule      modifications,      and      the      amount      of        other        business 

37a 
generated      by      the      insured.  For    example,    a    representative   of 

the    Hartford    Insurance    Group   has      indicated      that      its      company's 

underwriters        regularly      vary      from      the      ISO     manual      rates      in 

determining    premiums    for    products   coverage.       On    the    other    hand,    a 

Liberty    Mutual    representative    has    indicated    that   manual    rates    are 

usually   applied    to    smaller    risks 

ISO  itself  does  not  know  the  extent  to  which  insurance 
companies  abide  by  the  manual  and  guide  rates  in  determining 
premiums  .  Therefore,  the  best  sources  of  actual  premium  trends 
that  came  to  the  attention  of  the  Task  Force  were  the  Industry 
Study,  industry  association  surveys,  letters  from  the  public,  and 
information  provided  by  the  Product  Liability  Advisory  Committee 
to  the  Under  Secretary  of  Commerce.  These  sources  are  reviewed 
herein  . 

Industry  Study. — The  Industry  Study  found  that  83X  of  the 
firms  that  carry  products  coverage  do  so  through  comprehensive 
general      liability      (CGL)      policies      which      provide      a    variety   of 


VI-17 


coverages  in  addition  to  products  coverage.  Industry  Study, 
Table  IV-9  at  IV-28;  see  also  Insurance  Study  at  1-14.  The 
average  cost  of  CGL  coverage  for  the  firms  responding  to  the 
Industry  Study's  telephone  survey  increased  207%  during  the 
period  from  1971  through  1976.  The  increase  between  1974  and 
1976  was  119%.  Importantly,  the  level  of  CGL  cost  per  thousand 
dollars  of  sales,  as  well  as  the  percentage  increases,  were 
significantly  higher  for  medium-  and  small-size  firms  than  for 
large  firms.  See  Industry  Study,  Table  IV-10  at  IV-30,  or 
Chapter    III    of   this    report.    Table    III-5.       See    also    p.    V-20. 

Because  products  coverage  is  only  one  segment  of  the  coverage 
provided  by  a  CGL  policy,  the  industry  contractor  asked  the  firms 
reporting  cost  data  for  CGL  policies  to  estimate  the  cost  of 
their  products  coverage  for  their  entire  product  line  (per  $1,000 
sales)  from  1971  through  1976.  Approximately  80%  of  those  firms 
did  so,  and  their  estimates  are  contained  in  Chapter  III  of  this 
report.      The    a v er_a^£--B st ijnat ed    c^_st_for    products   coverage_fo r    all 

firms    was   $2.81    per    thousand    dollars   of      sales      in 1976.         These 

costs  ranged  from  $1.09  per  thousand  for  large  firms  to  $5.32  for 
small  firms.  See  Chapter  III,  Table  III-6;  or  Industry  Study, 
Table    IV-12    at    IV-33. 

The  average  increase  in  premiums  paid  per  thousand  dollars  of 
sales  for  products  coverage  between  1971  and  1976  for  all  firms 
responding  was  280%.  The  percentage  increases  in  the  cost  of 
products  coverage  for  the  periods  1971-1976  and  1974-1976  by  firm 
size    were    as    follows: 

Percentage    Increase    in    Cost    Per    $1,000   Sales 
for    Products    Coverage    in    CGL    Policies 
by    Firm    Size 


Size    of 
Firm 


Small    firms 
Medium    firms 
Large    firms 
All    firms 


Percent 
1971-1976 

384 
247 
102 
280 


Percent 
1974-1976 

226 

223 

98 

209 


Source:   Industry  Study,  Table  IV-12 
at  IV-33  (or  see  Chapter 
III  of  this  report.  Table 

III-6. 


VI-18 


Again,  both  the  estimated  cost  of  product  liability  coverage 
per  thousand  dollars  of  coverage  and  the  percentage  increases  in 
that  cost  were  substantially  higher  for  small-  and  medium-size 
firms   than    for    large    firms.       Id  » 

Estimates  of  the  cost  of  products  coverage  for  the  target 
product  categories  also  show  substantial  percentage  increases  in 
premiums  since  1974.  These  increases  followed  the  period  between 
1971  and  1974  during  which  the  cost  per  $1,000  of  sales  decreased 
for  more  than  half  of  the  target  categories.  See  Industry  Study, 
Table  IV-13  at  IV-34  or  Chapter  III,  Table  III-7.  The  percentage 
increases  in  the  estimated  average  cost  of  products  coverage  per 
$1,000  of  sales  for  the  target  product  categories  during  the 
periods   of    1971-1976    and    1974-1976    are    shown    below: 

Percentage    Increases    in    Estimated    Average    Cost 

of    Products    Coverage    Per    $1,000    Sales    for    Target 

Categories   between    1971    and    1976 


Product    Category 

Industrial    Machinery 
Metal    Castings 
Grinding    Wheels 
Industrial    Chemicals 
Power    Mowers 
Automotive    Components 
Pharmaceutic als 
Medical    Devices 
Aircraft    Components 


Percentage    Increase    in    Cost 
1971-1974      1974_1976      1971-1976 


15 

189 

231 

-23 

227 

153 

89 

90 

259 

-39 

271 

127 

-01 

276 

271 

8 

149 

170 

46 

388 

613 

-05 

414 

389 

-36 

71 

10 

Source:       Industry    Study,    Table    IV-13    at    IV-34    (see    Chapter    III    of 
this    report.    Table    III-7. 

The  target  product  categories  with  the  largest  premium 
increases  since  1974  were  (in  order  of  magnitude):  medical 
devices,  pharmaceuticals,  power  mowers,  industrial  chemicals,  and 
metal    castings. 


VI-19 


Despite  the  large  increases  indicated  above,  in  1976  the 
average  estimated  cost  of  products  coverage  exceeded  one  percent 
of  sales  only  in  three  target  categories:  pharmaceuticals 
(1.08%),  medical  devices  (1.12%)  and  aircraft  components  (1.11%). 
Id  .  Estimates  of  the  average  cost  per  $1,000  sales  for  products 
coverage  reported  by  firms  in  the  other  target  product  categories 
were  well  below  the  one  percent  level.  _Id^.  For  a  discussion  of 
some  of  the  problems  associated  with  the  "one  percent"  benchmark, 
see    the    discussion    at    pp.    VI-23    -   24. 

The  estimates  of  the  average  cost  of  products  coverage  per 
$1,000  of  sales  reported  in  Table  IV-13  of  the  Industry  Study  are 
subject  to  several  limitations.  First,  the  number  of  firms 
reporting  data  on  the  target  categories  is,  from  a  statistical 
perspective,  very  small.  That  total  number  varies  from  76  for 
1971  to  140  for  1976;  the  number  of  firms  reporting  per  target 
category   ranged    between    5    and    22    firms. 

Second,  the  findings  of  the  Industry  Study  on  this  subject 
are  to  some  extent  based  on  estimates  about  premiums  paid  over  a 
6-year  period.  This  is  because  the  cost  of  products  coverage 
within  a  CGL  policy  is  not  identifiable  for  some  firms  .  Nor  is 
that  cost  broken  down  by  specific  products  in  some  instances. 
Insurance    Study   at    2-30. 

Finally,  the  premium  level  reported  may  differ  depending  upon 
when  the  data  are  reviewed  by  the  responding  firm.  In  that 
regard,  the  Insurance  Study  describes  how  estimates  of  premiums 
may  be  affected  by  policy  audits,  loss  experience  under 
retrospective    plans,    and    policy   dividends.       Id . 

Trade  Assoc  iations . — The  findings  of  the  Industry  Study's 
telephone  survey  regarding  the  af fordabil ity  of  product  liability 
insurance  are  generally  in  accord  with  data  gleaned  from  various 
trade  association  surveys  which  were  made  available  to  the  Task 
Force.       See    pp.    III-18    -    48. 

For  example,  in  the  MAPI  survey,  86%  of  the  177  responding 
firms  reported  that  their  product  liability  insurance  premiums 
were  less  than  1%  of  sales.  MAPI  Survey  at  23.  Twenty-seven 
percent  indicated  that  their  premiums  were  less  than  0.1%  of 
sales.         Id.         Also,      58%      of   the    responding    firms    indicated    that 


VI-20 


their  total  product  liability  costs--compr ised  of  premiums,  the 
uninsured  cost  of  payments  to  others,  and  indirect  costs  related 
to  product  liability — increased  between  100%  and  1,000%  in  the 
past  five  years,  while  30%  reported  that  these  costs  increased 
less   than    100%    during    that    period.       ld_.    at    2M. 

Similarly,  the  average  product  liability  premium  cost  was 
less  than  1%  of  sales  for  46  of  the  60  firms  (77%)  responding  to 
the  National  Machine  Tool  Builders  Association  Product  Liability 
Survey  ("NMTBA  Survey").  NMTBA  Survey  at  C-87.  The  average 
premium  cost  for  the  other  14  firms,  all  of  whose  sales  ranged 
from  $5  million  to  $15  million,  was  between  1%  and  2%  of  sales. 
Id. 


Data  on  trends  in  the  average  cost  of  product  liability 
insurance  submitted  by  some  16  trade  associations  to  the  industry 
contractor  for  analysis  are  also  in  accord  with  the  findings  of 
the  telephone  survey  regarding  premium  increases.  See  Industry 
Study  at  IV-8,  IV-72  -  IV-74  (includes  data  from  NMTBA  Survey 
above).  Those  surveys  indicated  that  annual  premium  increases 
for  products  coverage  during  the  1974-1976  period  were  generally 
2  to  10  times  as  high  as  during  the  1970-1974  period.  16_.  at  IV- 
8.  The  range  of  annual  increases  during  the  last  2  years  was 
from  22%  to  225%  in  contrast  to  the  range  of  0%  to  55%  from  1970 
to    1974    ""  .       Id. 


Correspondence        Received         by        the 


Task      Force      Regarding 
by 


Af fordabil ity . — The    correspondence    received      by      the      Task      Force 

af fordabil ity      of      product      liability      insurance 

affected      more      severely      by 


regarding         the 

suggests    that    some    firms   have      been 

product      liability    insurance    premium    increases    than    was    indicated 

by    the    averages    found    in    the    Industry      Study.         This      information 

cannot      be      generalized,      but    it    is    presented    to    show   exceptional 

cases    that    are    sometimes    lost    in      mass      averaging      of      data.         It 

should    be   noted    that,    while  many   of   the    firms    writing    to    the    Task 

Force    stated    that    they   have    had    no    product    liability   claims      made 

against      them,      the      Task      Force      has      no      independent      knowledge 

regarding    the    claims   history   of   these      firms      or      the      degree      to 

which    they   have    implemented    adequate    loss    prevention    programs. 


A      total      of      323      letters      concerning    product    liability    were 
received    by   the    Task    Force    prior    to    January    31,     1977       .         Of      the 


VI-21 


168  firms  which  wrote  letters  specifically  addressing  the 
subjects  of  the  af fordabil ity  and  availability  of  products 
coverage,  33  firms  (20%)  declared  that  they  were  unable  to  obtain 
a  quote  for  products  coverage  from  any  insurer,  while  22 
companies  i^3%)  stated  that  products  coverage  was  unaf fordable . 
Another  113  firms  (67%)  stated  that  their  premiums  have  been 
rising  sharply  and  indicated  concern  as  to  whether  they  would  be 
able  to  obtain  affordable  product  liability  insurance  in  the 
future . 

Many  of  the  companies  that  wrote  to  the  Task  Force  regarding 
the  af fordabil ity  of  products  coverage  produce  durable  goods  such 
as  industrial  machinery.  A  description  of  five  typical  letters 
is  set  forth  below: 


V 


Industrial  machinery  manufacturer  with  minimum  1976 
premium  of  $26,520  for  $1.3  million  in  sales--a  premium 
increase  of  over  1,800%  in  one  year  and  a  premium  equal 
to  2%  of  sales;  increase  in  premium  will  reduce  gross 
profits  by  50%.  Letter  to  Secretary  of  Commerce 
(8/31/76). 


•  Industrial  machinery  manufacturer  with  1976  premium  of 
$232,000  for  $14  million  in  sales--a  premium  increase  of 
over  1,680%  since  1974  and  a  premium  equal  to  1.7%  of 
sales.      Letter    to    Task    Force    (10/7/76). 

•  Industrial  machinery  manufacturer  with  1976  premium  of 
$41,000  for  $4  million  in  sales--a  premium  increase  of 
486%    in    two    years.      Letter    to    Task    Force    (10/8/76). 

•  Packaging  machinery  manufacturer  with  1976  premiums  of 
$68,000  for  $1  million  in  coverage--equal  to 
approximately  2%  of  sales.  Letter  to  Task  Force 
( 10/1 1/76) . 

•  Manufacturer  of  insulation  stripping  equipment,  coverage 
unavailable  at  a  reasonable  cost.  Letter  to  Department 
of   Commerce    (6/7/76). 

Letters      received      by      the      Task      Force      from      firms    in    other 
industries    also    suggest    that    the    premium    increases      for      products 


VI-22 


coverage  have  been  greater  for  some  firms  than  the  average 
results  of  the  Industry  Study's  telephone  survey  would  indicate. 
For  example,  the  letters  provided  to  the  Task  Force  by  the  Senate 
Select  Committee  on  Small  Business  describe  a  range  of  premium 
increases    from    100%    to   7,200%    in    one    year 

The  Product  Liability  Advisory  Committee  to  the  Under 
Secretary  of  Commerce, — Another  source  of  information  was  the 
Product  Liability  Advisory  Committee  to  the  Under  Secretary  of 
Commerce.  Generally,  the  members  found  the  conclusions  in  the 
Industry  Study  regarding  increases  in  premiums  for  product 
liability  insurance  from  1971  through  1976  (set  forth  in  the 
Industry  Study  at  1-6)  to  be  consistent  with  their  own 
experience.  Transcript,  Advisory  Committee  on  Product  Liability, 
Fourth    Meeting,    pp.    38-41     (6/27/77). 

They  have  also  indicated  that,  subject  to  several  important 
caveats,  they  concurred  with  the  conclusion--which  was  set  forth 
in  the  Briefing  Report--that  for  most  industries,  product 
liability  insurance  premiums  remain  below  1%  of  sales  .  A 
number  of  members,  however,  expressed  the  belief  that  the  ^% 
figure  does  not  describe  the  full  impact  of  the  product  liability 
premium  increases  which  have  occurred  since  197^.  Their  caveats, 
which    are   discussed    below,    manifest    that   general    concern. 

First,  several  members  emphasize  that  for  certain  firms  and 
industries,         product        liability  insurance  premiums  are 

significantly      greater      than       1%      of      sales.         Furthermore,      only 

limited    amounts   of.„  coverage    are    available    to    such      firms. Small 

bus i n ess e s      a n d___inj[nji£;3_Q J:.ijr_er-S-__Q_C.d  1  e   goods _(^such_as  machin e 

tools)  which  have  been  in  business  for  a  relatively  long  period 
of  ~~time  are'  two  ~^jx^mples  of  the  type  of  firm  for  which  the  ^% 
figure    is   felt   to   be   unrepresentative 


Second,      they      point   out    that    the  ^%    figure  may   be   misleading 

because    it   overlooks    the    pyramidal    or  cumulative      effect      of      the 

cost      of      product      liability    premiums  as    a    product    passes    through 
the    chain    of  distribution 

Third,  some  committee  members  contend  that  the  current  1977 
situation  is  worse  and  that  new  data  collection  would  show  that 
the    ^%    figure    is   being    surpassed    by  more    companies 


VI-23 


Fourth,  there  are  many  other  costs  besides  insurance  premiums 
incurred  by  companies  as  a  result  of  the  product  liability 
problem       .  They      include      expenses      for      claims      handling      and 

investigation,  losses  paid  within  the  policy  deductible,  loss 
prevention  programs,  and  other  indirect  costs.  These  costs  are 
borne  totally  by  the  insured  and  are  not  reflected  in  the  1% 
figure.  See  discussion  of  impact  of  product  liability  upon  the 
cost    of   products.      See    pp.    VI -22   e_t.    seq . 

Impact  of  Product  Liabil ity  Insurance  Premium  Increases  Upon 
Small  Firms . — The  Task  Force  found  that  small  firms  in  the  target 
industries  have  been  affected  more  severely  by  the  increases  in 
product  liability  premiums  than  medium-  and  large-size  companies. 
The  data  available  to  the  Task  Force  suggest  not  only  that 
product  liability  insurance  is  more  expensive  for  small  firms 
than  for  large  firms  in  those  industries,  but  also  that  small 
firms  are  generally  less  able  to  cope  with  af fordabil ity 
problems . 

As  was  discussed  above,  the  Industry  Study's  telephone  survey 
found  that  the  size  of  the  percentage  increases  in  premiums  for 
products  coverage  during  the  period  from  1971  through  1976  was 
inversely  related  to  firm  size.  See  p.  VI-18.  It  also  found 
that  the  estimated  cost  per  thousand  dollars  of  sales  for 
products  coverage  was  consistently  higher  for  small  firms  than 
for  larger  firms  during  that  entire  period.  Industry  Study, 
Table  IV-12  at  IV-33.  Finally,  of  the  19  firms  that  reported 
products  coverage  to  be  unaf fordable ,  12  were  small  firms.  Id . , 
Table    IV-7    at    IV-26.       See    also    p.    V-2 1 . 

The  data  from  the  underwriting  file  survey  of  the  Insurance 
Study  differ  from  the  results  of  the  telephone  survey  described 
above.  The  underwriting  file  survey — which  was  not  restricted  to 
firms  in  the  target  industr ies--ind icated  that  the  percentage 
increases  in  rates  for  products  coverage  from  197^  to  1975  were 
much  greater  for  firms  with  over  $2.5  million  in  sales  than  for 
small  firms.  Insurance  Study  at  2-21..  Specifically,  it  found 
that  the  average  rate  increase  for  the  former  group  from  1974  to 
1975  was  510%,  while  for  small  firms  (under  $2.5  million  in 
sales)    the    average   rate    increase    was   only    39%.       Id. 


VI-2U 


There  is  no  certain  explanation  for  these  different  pictures 
of  the  relative  position  of  small  businesses  vis-a-vis  product 
liability.  The  difference  may  be  related  to  the  fact  that  the 
telephone  survey  was  restricted  to  the  target  manufacturing 
industries,  a  majority  of  which  were  thought  to  have  product 
liability  problems  when  they  were  selected  by  the  Task  Force, 
whereas  the  underwriting  file  survey  covered  all  types  of 
industries  including  retailers  and  wholesalers.  It  may  also  be 
related  to  the  fact  that  the  telephone  survey  describes  product 
liability  premiums  while  the  latter  describes  product  liability 
rates  (see  p.  VI-17).  If  the  firms  in  the  underwriting  file 
survey  had  been  stratified  by  industry  category,  as  well  as  by 
the  size  categories  used  for  the  Industry  Study's  telephone 
survey,    a   more   meaningful    comparison    could    be   made. 

In  any  case,  the  Insurance  Study  did  note  that  small  firms 
generally  have  been  less  able  to  cope  with  any  a f fordabil ity 
problems  they  might  encounter.  In  that  regard,  it  concluded  that 
firms  with  over  $10  million  in  sales  generally  have  been  able  to 
retain  essential  products  coverage  at  an  affordable  premium,  in 
spite  of  the  substantial  increases  in  product  liability  rates,  by 
making  certain  modifications  in  their  coverage.  These 
modifications  include  assuming  a  larger  deductible  or  accepting  a 
retrospective  rating  plan.  J^.  at  ES-5.  It  found  smaller 
companies  to  be  less  flexible  in  their  insurance  needs  and  unable 
to  adapt  their  coverage  to  meet  the  exigencies  of  the  current 
product    liability    problem.       Id . 

Information  from  the  Product  Liability  Advisory  Committee  to 
the  Under  Secretary  of  Commerce  and  from  the  National  Association 
of  Insurance  Commissioners  indicates  that  products  coverage  is 
less    affordable    for    any    small    companies    than    for    larger      firms 

The      National  Association      of      Insurance      Commissioners    (the 

"NAIC")    concluded  from    its    study   of   product      liability      that      any 

availability      and  af fordabil ity    problems    affected    primarily    small 
businesses 

Insurers  have  given  reasons  why  premiums  may  be  less 
affordable  for  some  small  companies  .  First,  some  small 
businesses  are  less  able  to  keep  abreast  of  and  implement 
technological    advances   relating    to    the    safety   of      their      products 


VI-25 


51 
than      larger-size      firms      .      While   data    suggest    that    this    is    true 

in    certain      cases,      it      does      not      explain      all      of      the      premium 

differences   between    large    and    small    businesses. 

Second,  small  firms  may  not  have  the  financial  resources 
necessary  to  retain  a  significant  portion  of  their  risk  exposure 
through  a  high  deductible,  a  step  which  would  reduce  premium 
costs.  This  is  evidenced  by  the  high  incidence  of  low 
deductibles  observed  among  small  firms  by  both  the  insurance  and 
industry  contractors.  Insurance  Study  at  1-15;  Industry  Study, 
Table  IV-15  at  IV-37.  A  staff  analysis  of  the  data  collected  in 
the  Industry  Study,  however,  suggests  that  the  difference  in  the 
level  of  deductibles  between  large  and  small  firms  does  not 
account    for    all    of   the    premium    differences. 

Third,  the  impact  of  high  product  liability  insurance  rates 
for  hazardous  products  upon  a  firm's  product  liability  premiums 
can    be   diluted    by   low-risk    products    sold    by   that    firm.  To    the 

extent  that  small  firms  tend  to  have  a  narrower  product  mix  than 
medium-  and  large-size  firms,  they  may  be  less  able  to  benefit 
from  this  dilution  effect.  The  insurance  industry  has  not 
provided  extensive  specifics  about  this  assertion  or  indicated 
why  it  could  not  utilize  a  product-by-product  premium  (breaking 
down    the    premium    for    businesses    with    a   diverse    product  mix). 

Fourth,  insurance  companies  do  not  consider  the  individual 
loss  experience  of  small  firms  to  be  credible  for  underwriting 
purposes.  Therefore,  insurance  companies  do  not  credit  small 
firms  for  good  loss  experience  when  determining  their  product 
liability  insurance  premiums,  as  they  do  in  the  case  of  large 
firms.  Similarly,  insurance  companies  are  reportedly  unwilling 
to  rate  small  firms  retrospectively.  Insurance  Study  at  ES-5 . 
The  validity  of  these  practices  is  questioned  by  many  small 
businesses . 

Fifth,  insurance  companies  perceive  a  greater  margin  of 
protection  in  providing  products  coverage  to  large  firms  because 
of  the  large  premiums  they  generate.  The  insurance  companies 
believe  that,  all  other  things  being  equal,  the  probability  that 
a  product  produced  by  a  small  firm  will  cause  an  injury  is  the 
same  as  that  for  a  product  produced  by  a  large  firm.  They  appear 
to      be   comforted    by   the    greater    likelihood    that    the    large    premium 


VI-26 


generated    by   a    Is^ge   company    will    cover    any   big    loss    than    is    true 
for    small    firms 


Finally,  insurance  company  underwriters  may  be  inclined  to 
reduce  product  liability  premiums  for  large  firms  because  they 
find  other  portions  of  those  accounts  to  be  very  desirable 
business  .  This  last  point  would  appear  to  have  the  broadest 
applicability.  Overall,  product  liability  premiums  may  be  less 
affordable  for  a  small  business  than  for  a  larger  business 
producing  a  product  with  the  same  risk  characteristics.  Compare 
the  discussion  at  pp.  V-19  -  23  in  regard  to  insurance  industry 
comment   on    this    point. 


Impact  of  Product  Liabil ity  Upon  the  Cost  of  Products . --One 
cannot  systematically  measure  the  impact  of  the  increased  cost  of 
product  liability  insurance  upon  the  cost  of  products,  and 
policymakers  should  be  wary  of  any  generalizations  made  about 
this    subject. 

As  this  report  has  indicated,  estimates  can  be  made  about 
product  liability  as  a  percentage  of  sales.  See  pp.  VI-18  -  20. 
Nevertheless,  a  company  must  then  make  a  judgment  as  to  whether 
and  how  it  can  pass  on  the  cost  of  product  liability  insurance  in 
the  price  of  its  product.  It  has  been  reported  to  the  Task  Force 
that  some  companies  in  the  pharmaceutical  industry  have  been  able 
to  do  this  with  surprising  ease  .  In  contrast,  manufacturers  of 
sporting  goods  have  alleged  that  premiums  for  product  liability 
coverage  already  represent  15%  of  the  sales  price  of  some 
sporting  goods  equipment,  and  it  may  not  be  possible  to  increase 
prices    further. 

A  manufacturer  of  durable  goods  which  has  been  in  business 
for  a  long  time  may  not  be  able  to  "pass  on"  increased  product 
liability  premium  costs  in  the  price  of  his  product.  This  is 
because  the  a  large  portion  of  the  rise  in  his  premium  may  be  due 
to  risks  posed  by  older  products  that  are  still  in  use.  A  newer 
manufacturer  of  such  equipment  would  not  be  burdened  with  such 
product  liability  premium  costs.  In  order  to  remain  competitive 
with  the  newer  companies,  the  older  manufacturer  may  be  unable  to 
reflect  increased  product  liability  insurance  costs  in  the  price 
of  his    product . 


VI-27 


Some  manufacturers  of  machine  tools  have  estimated  that  at 
present,  product  liability  insurance  premiums  comprise  over  10% 
of  the  price  of  their  products  .  This  estimate  would  appear  to 
be  the  "high-water  mark."  In  most  situations  in  our  target 
industries,  product  liability  insurance  represents  less  than  1% 
of  sales.  If  we  assume  that  the  manufacturer  is  able  to  pass  on 
this  cost  to  the  purchaser,  this  does  not  mean  that  the  price  of 
the  "end  product"  will  increase  only  IX.  Howevever,  if  some 
intermediate  handlers,  such  as  distributors  and  retailers,  have 
been  subject  to  increased  product  liability  premium  costs,  they, 
in  turn,  may  attempt  to  pass  on  that  cost  to  the  purchaser  of  the 
product 

Finally,    there    are  many   other    costs,    in    addition    to    insurance 

premiums,    incurred    by    firms    as    a      result      of      product      liability. 

They      also      may      cause    the    price   of   a    product   to    increase.      These 

other    costs    include,    without    limitation:      losses      paid      that      are 

within      the      policy   deductible,    claims   handling    and    investigation 

by   a      company,      legal      staff      expenses,      product      liability      loss 

prevention      programs,      and      non-legal      defense      expenses.         These 

costs,    too,    are    subject    to    the    cumulative   effect   described      above 

at      each      link      of   the    production    chain.       Unfortunately,    accurate 

data    with    respect    to    these    costs   may   be      impossible      to      compile. 

Some      industry      sources      allege      that      the      total    amount   of   these 

57 
uninsured    costs    are    substantial 

Subject  to  these  limitations,  our  data  regarding  the  cost  of 
product  liability  insurance  as  a  percentage  of  sales  give  a  very 
general  idea  about  how  increased  product  liability  insurance 
costs   have    affected    the    price   of   products. 

Product    Introduction    and    Discontinuation 

Introduction 

The  Briefing  Report  found  that  concern  about  product 
liability  has  caused  some  manufacturers,  e.g.,  pharmaceuticals, 
to  forego  or  delay  the  introduction  of  new  products.  The  final 
draft  of  the  Industry  Study  and  other  new  information  reaching 
the    Task    Force    have    supported    this    finding. 


VI-28 


Some  sources  have  alleged  that  product  liability  suits  and 
increased  product  liability  premiums  have  had  a  substantial 
effect  on  diminishing  the  development  of  new  and  worthwhile 
products  in  American  industry.  We  have  not  been  able  to 
substantiate    these    assertions. 

Product  liability  problems  may  in  certain  industries 
reinforce  trends  against  new  product  development,  and  some 
socially  beneficial         products        may        never        be        developed. 

Furthermore,  product  liability  may  cause  some  manufacturers  to 
discontinue  production  of  existing  products.  These  trends  may  be 
especially  true  for  smaller  firms  that  produce  high-risk 
products.  On  the  other  hand,  some  of  the  products  that  are  not 
produced  or  that  are  discontinued  may  be  ones  whose  potential  for 
causing  harm  outweighs  their  social  utility.  In  the  time  period 
of  our  study  we  were  not  able  to  make  a  determination  on  this 
issue,    but    we    believe    it   deserves    further    attention. 

Analysis 

Industry  Study  Findings . — The  industry  contractor  found  that 
26  of  the  337  firms  it  surveyed  (8X)  stated  that  they  had  delayed 
or  cancelled  the  introduction  of  new  products  because  of  product 
liability  problems.  See  Industry  Study  at  IV-13.  Twenty-three 
of  the  firms  surveyed  (7%)  reported  decisions  to  discontinue 
products  during  1975  and  1976.  Industry  Study  at  IV-12.  Another 
13  firms  (4%)  stated  that  they  were  considering  discontinuing  one 
or  more  products.  Industry  Study  at  IV-63.  In  addition,  among 
the  20  firms  interviewed  in  personal  visits  by  the  industry 
contractor,  6  firms  reported  some  constraint  or  reduction  of 
product  lines  because  of  product  liability  considerations. 
Industry    Study   at    IV-102. 

Other  Surveys  of  Product  Manuf ac turer s . --The  National 
Federation  of  Independent  Business  ("NFIB")  found  that  12.8%  of 
the  1,296  firms  responding  to  its  survey  reported  that  product 
liability  problems  caused  them  to  forego  the  development  of  a  new 
product  (new  to  their  firm).  NFIB  Survey  at  11  (January,  1977). 
In  addition,  4.6%  of  the  responding  firms  stated  that  they  had 
discontinued  a  product  or  plan  to  do  so  because  of  product 
liability   considerations.       Id.    at    10. 


VI-29 


Two  other  surveys  indicate  that  product  liability  has 
affected  the  product  mix  of  business  firms.  The  survey  conducted 
by  MAPI  found  that  16%  of  the  responding  firms  (33  of  206) 
believed  that  the  increase  in  product  liability  claims  has 
inhibited  the  development  of  new  products  or  caused  the 
discontinuation  of  existing  products.  MAPI  Survey  at  2,  25. 
Similarly,  17%  (31  of  180)  of  the  firms  responding  to  a  survey 
conducted  by  five  members  of  the  U.S.  House  of  Representatives 
stated  that  they  had  been  "forced  to  abandon"  at  least  one 
product  as  a  result  of  product  liability 


^V 


y^ 


Net  Impact  Upon  Society  of  Product  Liabil ity ' s  Inhibiting 
Effect  on  New  Product  Development . — It  is  difficult  to  assess 
whether  the  net  impact  upon  society  of  product  liability's 
inhibiting  effect  on  new  product  development  is  positive  or 
negative.  Product  liability  may  deprive  society  of  products 
which,  though  dangerous,  would  nonetheless  be  beneficial,  e.g., 
highly  effective  drugs,  which  induce  serious  side  effects  in  a 
small  proportion  of  the  user  population.  On  the  other  hand,  it 
may  cause  manufacturers  to  forego  or  discontinue  production  of 
unreasonably  dangerous  products  or  to  delay  their  production 
until    design   or    production    improvements   can    be    implemented. 


iT 


The  recent  Swine  Flu  program  is  an  example  of  the  potential 
impact  of  product  liability  URon  the  introduction  of  new  products 
and  its  effect  upon  society  .  In  that  situation  the  President 
determined  that  the  swine  flu  vaccine  would  be  a  socially 
beneficial  product  which  was  vitally  necessary  to  protect  the 
population  against  a  predicted  nationwide  epidemic  of  swine  flu. 
Congress  appropriated  $135  million  to  fund  a  mass  immunization 
program.  The  pharmaceutical  companies  which  were  to  provide  the 
vaccine,  however,  refused  to  proceed  with  the  production  of  the 
vaccine  because  they  were  unable  to  obtain  adequate  product 
liability  insurance.  Despite  the  fact  that  in  most  states 
manufacturers  of  pharmaceuticals  have  no  duty  to  warn  about 
un foresseeable  risks  and  are  not  subject  to  liability  for 
unavoidable  risks  when  a  proper  warning  is  given,  the  companies 
and  their  insurance  carriers  were  unwilling  to  assume  the  entire 
risk  of  the  program.  Their  apparent  rationale  was  that  they 
could  be  subject  to  defense  costs  and  protracted  litigation  as 
courts   decided    these    issues 


VI-30 


The  solution  agreed  to  by  the  insurance  carriers  and  Congress 
had  the  effect  of  shielding  the  pharmaceutical  companies  from 
liability  for  other  than  negligence  and  from  the  burden  of 
defending  the  potentially  large  number  of  claims  which  might 
arise    from    the    program 

The  Swine  Flu  situation  is  characteristic  of  the  product 
liability  problem's  potential  to  affect  new  product  introduction, 
especially  with  respect  to  the  pharmaceutical  and  medical  devices 
industries.  As  has  previously  been  described,  these  two 
industries  have  suffered  the  largest  percentage  increase  in  their 
product  liability  premiums  of  all  the  target  industries  during 
the  period  of  1971  through  1976,  according  to  the  Industry 
Study's  survey  .  The  pharmaceutical  and  medical  devices 
industries  also  have  had  the  largest  percentage  increases  in 
premiums  during  the  period  197^-1976:  pharmaceuticals,  388%; 
medical    devices,    41M%. 

Several      letters      received    by   the    Task    Force    since    January    1, 

1977,    indicate    that    the    product    liability    problem   might      be      more 

severe      for   certain    companies    in    these    two    industries,    especially 

highly    innovative    firms.       For    example,    one    company    which    produces 

medical      implants      was      able      to      obtain      only   one-tenth    its    1975 

coverage    in    1976,    yet      its      total      premium      increased      43%.         The 

president   of   this   company    indicated    that    the    distributors    for    his 

products    were    reluctant    to    handle    them    because    of      his      company's 

"inadequate"      product      liability      coverage.      The    writer    said    that 

his   company   has   never      had      a      product      liability      claim      brought 

62 
against      it      .         Another    company    which    produces  medical    equipment 

stated    in    its    letter    to    the    Task    Force    that   only      after      a      great 

deal      of      effort    was    it    able    to    secure   $1    million    in    coverage    for 

1977--which    the    company   president    found    to    be    " inadeaua te"--at    an 

annual    premium    of   $197,500    or    12.3    percent   of   sales 

To  the  extent  that  companies  manufacturing  pharmaceuticals 
and  medical  devices  are  unable  to  obtain  affordable  product 
liability  coverage  for  their  new  products,  as  initially  occurred 
for  the  swine  flu  vaccine,  there  may  be  an  adverse  impact  upon 
medical  research  and  upon  the  development  and  marketing  of  new 
products    which  may   be    socially   beneficial 


VI-31 


By  reducing  the  amount  of  product  innovation  and  causing  the 
discontinuation  of  some  products,  product  liability  may  have  a 
second  adverse  impact.  It  may  cause  a  reduction  in  competition 
within  certain  industries  and  in  the  number  of  small 
businesses  .  In  that  regard,  the  NFIB  Survey  indicated  that 
this  impact  may  be  concentrated  in  certain  industries.  It  found 
that  firms  in  selected  manufacturing  industries  were  two  to  three 
times  as  likely  to  discontinue  or  to  fail  to  develop  a  product 
than  the  firms  surveyed  overall  .  This  tendency  could  lead  to 
higher  concentrations  of  market  power  within  those  industries. 
Also,  because  many  of  the  firms  surveyed  by  the  NFIB  have  only 
one  product  line,  their  failure  to  introduce  new  products  or 
their  discontinuation  of  a  product  may  dramatically  reduce  their 
ability  to  compete 

Business  Failures 

Introduction 

The  Briefing  Report  indicated  that  the  Task  Force  had  no 
evidence  that  product  liability  problems  were  forcing  companies 
out  of  business.  Nevertheless,  this  is  a  topic  where  many 
undocumented  assertions  have  been  made  that  this  was  indeed 
occurring 

Neither  the  independent  contractors  nor  the  other  sources 
outlined  at  pp.  1-7  -  17  produced  a  single  verified  case  of  a 
business  failure  solely  and  directly  caused  by  product  liability 
problems.  Circumstantial  evidence,  however,  suggests  that 
substantial  product  liability  premium  increases  may  be  one  of 
several  causes  that  lead  to  the  closing  of  small  businesses  in 
high-risk  product  lines.  Also,  some  small  businesses  in  the 
future  could  be  placed  in  default  by  product  liability  judgments. 

Analysis 


Business  Termination  because  of  Product  Liability  Premium 
Costs . — Substantial  increases  in  the  cost  of  product  liability 
insurance  may  make  some  companies  unprofitable.  Product 
liability  premiums  have  increased  generally  by  several  hundred 
percent  since  1974  (pp.  VI-17  "^g^^r  but  some  companies  have 
experienced    increases   of   over    1,000% 


VI-32 


While  we  have  found  that  in  most  instances  the  cost  of 
product  liability  insurance  remains  below  one  percent  of  sales, 
it  has  been  reported  that  some  Xii^ms  are  required  to  pay  premiums 
equal  to  more  than  10%  of  sales  .  To  the  extent  that  companies 
are  unable  to  pass  this  increased  cost  on  to  their  customers, 
product  liability  may  severely  reduce  or  eliminate  their  profit 
margins.  This  would  appear  most  likely  to  occur  with  respect  to 
manufacturers  of  durable  goods  where  present  prices  may  not  be 
able  to  absorb  liability  costs  that  have  arisen  due  to  products 
produced    in    the    remote    past. 

It  also  may  occur  with  regard  to  companies  that  operate  on 
very  low  profit  margins  (ratio  of  net  profits  before  tax  to  gross 
sales).  Profit  margins  for  wholesaler-distributors,  for  example, 
reportedly  average  about  ^%  to  3%  of  gross  sales  .  Thus,  if  a 
firm  had  a  3  percent  profit  margin  and  it  was  subject  to  an 
increase  in  product  liability  premiums  from  0.5  percent  to  1.5 
percent  which  could  not  be  passed  on  to  its  customers,  its  net 
profits  before  tax  would  be  reduced  by  one-third  (assumming  all 
other  costs  remained  the  same).  To  assess  the  ultimate  impact  of 
this  increase  on  the  firm  in  question,  however,  one  must 
determine  the  effect  of  premium  increases  upon  its  rate  of  return 
on    invested    capital. 

It  has  been  suggested  to  the  Task  Force  that  companies  which 
are  unable  to  obtain  adequate  and  affordable  product  liability 
insurance  may  choose  to  liquidate  voluntarily  rather  than  to 
expose  their  net  worth  to  substantial  uninsured  risks  from 
product  liability.  Only  one  instance  (unverified)  of  such  a 
voluntary,.^tiquidation  has  been  brought  to  the  attention  of  the 
Task   Forc(4I -'. 


In    this    instance,    a    firm's    premiums   reportedly    increased    from 
$2,000    to    $200,000    in    one    year.         This      example      has      been      cited 
frequently,      but    no    source    has    undertaken    an    independent   detailed      Cy^y 
investigation    of   the    circumstances   of      this      company's      voluntary 
1 iquidation . 

Recently,  the  names  of  several  other  firms  that  allegedly 
have  terminated  business  due  to  increased  product  liability 
premiums  have  been  reported,  to  the  Task  Force,  but  the 
circumstances   of   these    firms    also    have   not   been    verified 


VI-33 


There  are  several  reasons  why  it  is  difficult  to  obtain 
accurate  information  as  to  whether  businesses  fail  because  of 
product  liability.  First,  companies  which  have  gone  out  of 
business  are  not  likely  to  respond  to  surveys  or  to  make  their 
views  known  by  other  means.  Second,  it  is  very  difficult  to 
determine  the  cause  of  a  business  failure.  Verifying  that 
increased  product  liability  premiums,  rather  than  insufficient 
capitalization,  mismanagement,  or  a  combination  of  factors, 
caused  the  demise  of  a  particular  business  may,  in  fact,  be 
impossible.  This  is  particularly  true  for  small  businesses  which 
have  an  average  life  expectancy  of  only  several  years. 

In  sum,  circumstantial  evidence  suggests  that  in  some 
instances,  increased  product  liability  prem.iums  may  be  one  of 
several  factors  that  might  cause  a  small  manufacturer  of  a  high- 
risk  product  to  terminate  operations. 

Business  Termination  because  of  Unsatisfied  Product  Liabil ity 
Judgments . — As  will  be  indicated  in  our  discussion  of  mandatory 
product  liability  insurance  and  unsatisfied  judgment  funds,  no 
case  has  been  reported  to  the  Task  Force  where  a  manufacturer  was 
unable  to  respond  to  an  adverse  product  liability  judgment.  See 
p.  VII-I90.  The  potential,  however,  may  exist.  In  that  regard, 
the  Industry  Report  showed  that  within  the  small  firm  category, 
29%  of  those  surveyed  had  no  product  liability  insurance.  See 
Industry  Study  at  1-7.  Most  respondents  said  that  they  "did  not 
need  it".  The  contractor  did  not  determine  whether  these 
companies  had  sufficient  capital  and  income  to  respond  to  product 
liability  judgments,  and  it  is  unlikely  that  those  manufacturers 
would  voluntarily  come  forth  with  that  information.  We  do  know 
that  most  of  the  companies  surveyed  by  the  contractor  produce 
high-risk  goods  and  would  have  greater  potential  than  the  average 
company  to  be  subject  to  product  liability  suits. 

The  recent  NFIB  Study  shows  that  almost  3%  of  its  small 
business  membership  have  recently  "gone  bare";  they  used  to  have 
product  liability  insurance  and  no  longer  can  affort  it.  NFIB 
Survey,  p.  3  (1977).  That  survey,  however,  does  not  disclose 
whether  those  companies  can  affort  to  self-insure. 


VI-34 


In  sum,  circumstantial  evidence  suggests  that  a  few 
businesses  may  be  operating  without  sufficient  economic  resources 
to  enable  them  to  respond  to  a  series  of  substantial  product 
liability  judgments.  At  this  point,  however,  we  are  left  to 
speculation  on  the  matter  and  for  that  reason  did  not  conclude 
that  it  is  necessary  to  enact  mandatory  product  liability 
insurance  laws  or  establish  unsatisfied  judgment  funds  at  this 
time 

TRENDS  IN  THE  NUMBER  OF  PRODUCT  LIABILITY  CLAIMS 

Introduction 

The  Briefing  Report  did  not  provide  a  discussion  of  trends  in 
the  number  of  product  liability  claims  or  lawsuits.  At  that  time 
our  data  were  too  inchoate  to  reach  conclusions  on  those 
subjects.  The  Briefing  Report  did  note  that  the  total  dollar 
amount  of  pending  claims  appears  to  have  increased  substantially 
in  the  1970-75  period.  The  final  version  of  the  Industry  Study 
has  confirmed  that  finding.  See  Industry  Study  at  1-8;  Chapter 
III  at  p.  3  (showing  the  average  number  of  pending  claims 
increased  nearly  six  times  from  a  level  of  3-5  in  1971  to  18.9  in 
1976).  As  Chapter  III  indicates,  large  firms  had  the  greatest 
pending  claims  frequency.   See  p.  III-13. 

In  spite  of  the  fact  that  our  data  are  still  not  extensive, 
we  believe  it  is  important  to  set  forth  our  findings  as  to  trends 
in  the  number  of  product  liability  claims  and  lawsuits,  for  these 
are  areas  in  which  both  policymakers  and  the  public  have  been 
confronted  with  a  great  deal  of  misinformation.  Some 
misinformation  results  from  the  fact  that  people  are  not  always 
careful  in  making  the  distinction  between  a  claim  and  lawsuit. 
Some  results  from  the  use  of  insubstantiated  data  and  unreliable 
estimates  to  advocate  a  particular  point  of  view.  It  should  be 
noted  that  no  organization,  private  or  public,  currently  records 
all  product  liability  claims  or  lawsuits.  The  Insurance  Services 
Office  records  some  data  on  product  liability  claims.  In  the 
judicial  system,  only  the  State  of  Connecticut  and  the  federal 
courts  process  data  on  product  liability  law  suits. 


VI-35 


Analysis 

Despite  the  lack  of  comprehensive  data,  estimates  of  the 
number  of  product  liability  claims  and  lawsuits  have  been  bandied 
about    by    all    sides   of   the    product    liability   controversy. 

Some  representatives  of  the  insurance  industry  and  of  product 
manufacturers  have  asserted  that  between  1,000,000  and  1^^500,000 
product      liability      lawsuits      were      commenced      in       1975.  Very 

recently,    a    product   liability    insurer    advertised      in      a      national 
news   magazine    that   one  million    claims    were    filed    in    1976. 

Representatives  of  consumers  and  of  plaintiffs'  attorneys 
have  questioned  these  estimates,  contending  that  there  is  no 
evidence  to  support  these  large  numbers.  For  example,  Mr.  Ralph 
Nader  stated  at  the  First  World  Congress  on  Product  Liability 
that  the  number  of  oroduct  liability  lawsuits  filed  annually  is 
approximately    50,000. 

If  accurate  information  on  the  number  of  product  liability 
claims  and  lawsuits  were  available,  it  would  be  valuable  for  at 
least  two  important  reasons.  First,  it  would  indicate  how  many 
of  the  persons  injured  by  products  enter  into  the  product 
liability  system  seeking  compensation  for  injuries.  That 
information  would  be  useful  in  evaluating  the  tort  liability 
system    as    a    reparations  mechanism. 

Second,  such  data  might  provide  a  rationale  for  the  rise  in 
product  liability  insurance  premiums  which  has  been  observed 
since  197^.  See  p.  Vl-17  _et..  seq .  Our  conclusions  as  to  how 
these    data   might    be    obtained    are    set    forth    at    p.    V-48. 

Trend    Data    Collected    and    Reviewed    by    This    Study 

Industry    Study 

The  Industry  Study's  telephone  survey  showed  that  the  number 
of  new  product  liability  claims  reached  an  apparent  plateau  in 
the  period  from  1973-1975.  See  Industry  Study  at  1-8.  The  same 
trend  was  evident  in  the  industry  association  surveys.  _Id.  at 
1-9.       The    telephone    survey    also    indicated    that    the    average    amount 


VI-36 


of  damages  sought  per  firm  rose  substantially  from  1971  to  1976, 
but  there  the  average  amount  of  settlements  stabilized  in  the 
period  1973  to  1975.   See  W..  at  1-9. 

Insurance  Services  Office 

A  representative  from  the  Insurance  Services  Office  recently 
testified  that  that  organization  has  "no  reliable  quantitative 
analysis  to  indicate  whether  and  to  what  extent  claim  frequency 
is  increasing* 

On   the   basis   of   preliminary   data  from  ISO's  Closed  Claim 

Survey,  the  organization  estimates  that  between  60,000  and  70,000 

product   liability   claims   are   filed   annually   in   the   United 

79  a 
States.     The  basis  for  this  estimate  would  appear   to   be   the 

fact   that  ISO  was  able  to  locate  24,000  closed  product  liability 

claims  during  that  8.5  month  closed  claim   study.    It   estimates 

that  the  23  companies  participating  in  the  study  write  60  percent 

of  the  total  product  liability  coverage. 

This  would  render  the  ISO  estimate  a  reasonable  one  in  light 
of  the  fact  that  the  number  of  claims  closed  in  a  given  year  does 
not  necessarily  reflect  the  number  of  claims  made:  there  is  a 
gap  between  the  time  a  claim  is  made  and  when  it  is  closed. 
Again,  data  are  not  available  at  the  present  time  to  make  a 
better  estimate;  we  believe  that  ISO's  estimate  as  to  the  number 
of  insurance  claims  filed  annually  is  about  the  best  "guess"  that 
has  been  made  to  date. 

Connecticut  Court  System 

Regarding  trends  in  the  number  of  lawsuits,  Connecticut  is 
the  only  state  which  collects  data  on  the  number  of  product 
liability  cases  filed  annually.  That  data  shows  that  the  number 
of  product  liability  suits  filed  in  the  State  of  Connecticut  rose 
58%  from  1974  to  1976.  See  p.  11-45.  The  total  number  of  cases 
filed  in  1975  was  174. 

Federal  Court  System 

Likewise,  statistics  from  the  Federal  court  system  indicate 
an  unquestionable  increase  in  the   number   of   product   liability 


VI-37 


lawsuits  being  filed.  The  number  of  such  cases  has  increased 
from  1,579  in  197M  to  2,886  in  1975,  to  3,696  in  1976.  This 
represents  an  increase  of  13^  percent  in  two  years.  In  fiscal 
year  1976,  these  new  product  liability  lawsuits  comprised  14.4 
percent  of  the  new  tort  cases  but  only  2.8  percent  of  the  civil 
cases   commenced    in    Federal    district   court.      See    p.    11-45. 

Legal    Study's    Survey  of   Appellate    Cases 

As  Chapter  II  indicates,  our  Legal  Study  included  a  survey  of 
the  appellate  decisions  involving  product  liability  from  eight 
sample      states      during    the    period    from    1965   through   September   29, 

1976.      See    p.    II-8, 

The  survey  found  that  the  number  of  product  liability 
appellate  cases  increased  by  71  percent  from  the  1965-1970  period 
to  the  period  January  1971  through  September  1976.  See  p.  11-51. 
Of  course,  an  increase  in  appellate  cases  does  not  necessarily 
reflect  an  increase  in  the  number  of  product  liability  claims  or 
lawsuits.  It  is  also  of  note  that  the  contractor  found  that  33 
states  had  an  insufficient  number  of  reported  product  liability 
decisions  to  be  included  in  the  survey.  Vol.  Ill,  Legal  Study  at 
38. 

COMPENSATION  OBTAINED  BY  PERSONS  INJURED  BY  PRODUCTS 

Introduction 

The  Briefing  Report  indicated  that  some  persons  who  are 
injured  by  products  receive  full  compensation  from  the  present 
tort-litigation  system,  but  many  persons  do  not.  "Full 
compensation"  was  defined  as  total  recovery  of  all  loss  of 
earnings,  medical  costs  and  other  injury-related  expenditures. 

Some  sources  have  stated  their  belief  that  product  liability 
is  the  major  source  of  compensation  for  persons  injured  by 
products.  Taking  account  of  all  weaknesses  in  data  bases, 
existing  information  suggests  that,  relative  to  other  sources  of 
compensation  such  as  health  insurance,  welfare  systems,  and 
Worker  Compensation,  that  is  not  case.  For  example,  the  number 
of   product-related   injuries   is  many  times  the  number  of  claims 


VI-38 


made.  Furthermore,  there  is  little  precise  information  as  to 
what  percentage  of  persons  who  file  claims  actually  recover  full 
compensation . 

Analysis 


Preliminary  data  available  from  the  ISO  Closed  Claim  Survey 
indicate  that  approximately  70  percent  of  the  claimants  received 
a  payment  from  insurance  companies  under  product  liability 
policies.  Seventy-five  percent  of  the  claimants  receiving  a 
product  liability  insurance  payment  obtained  an  amount  equal  to 
or  exceeding  their  "economic  losses,"  defined  as  medical 
expenses,  W^g^  losses,  and  out-of-pocket  expenses  other  than 
legal  fees. 


In  contrast  to  the  above,  the  available  data  suggest  that 
persons  who  litigate  their  case  to  a  final  verdict  are  confronted 
by  a  great  deal  of  uncertainty.  Thus,  more  than  50  percent  of 
those  persons  recover  no  damages.  On  the  other  hand,  the 
plaintiffs  who  do  recover  damages  in  a  litigated  case  recover 
more  on  the  average  than  those  who  settle  their  claim. 

Finally,  with  respect  to  cases  that  require  litigation 
(either  because  liability  or  the  amount  of  damages  is  irrevocably 
in  dispute),  it  should  be  noted  that  some  persons  with  smaller 
claims  may  not  be  able  to  obtain  the  services  of  an  attorney.  We 
have  no  data  on  this  point,  but  experienced  plaintiffs'  attorneys 
have  made  this  observation  and  do  not  appear  to  have  been 
disputed  on  the  matter. 


THE   RELATIONSHIP 
ACCIDENTS 


BETWEEN   PRODUCT   LIABILITY  CLAIMS  AND  PRODUCT 


Introduction 

The  Briefing  Report  indicated  that  the  rate  of  increase  in 
product  liability  claims  appears  to  have  been  rising  in  excess  of 
the  rate  of  the  increase  in  actual  product  injuries.  The 
significance  of  this  finding  relates  to  the  causes  of  the  product 
liability  problem:  it  suggests  that  the  problem  is  not  due  to  an 
increase  in  the  number  of  product-related  accidents. 


VI-39 


The  finding  was  based  on  a  preliminary  draft  of  the  Industry 
Study.  While  subsequent  information  has  reaffirmed  the  finding, 
it  also  suggests  that  some  emphasis  be  placed  on  the  limitations 
on  the  data  that  support  it.  The  finding  would  appear  to  be 
firmer  in  regard  to  workplace  products  than  consumer  products. 

Analysis 

Workplace    Product-Related    Injuries 

The  Industry  Study  concluded  that  there  was  no  apparent  trend 
in  the  frequency  or  severity  of  workplace  injuries  from  1966  to 
1972  among  the  industrial  products  selected  by  the  Task  Force  for 
study  which  would  explain  any  increase  in  the  number  of  claims 
and  lawsuits  against  product  manufacturers.  See  Industry  Study 
at  1-12,  III-2.  The  industry  contractor  based  its  conclusion 
upon  an  analysis  of  Worker  Compensation  cases  closed  during  that 
period  in  the  State  of  New  York.  16.  at  lll-^n  -  III-22.  That 
analysis  found  no  significant  increase  in  the  number  of  cases 
closed,  the  number  of  weeks  of  compensation  awarded,  or  the  total 
compensation  awarded  --  both  in  the  aggregate  and  for  each  target 
product  class.  _Id^.  (The  Industry  Study  utilized  data  on  the 
number  of  weeks  and  total  amount  of  compensation  awarded  as 
surrogates    for  measuring    trends   in    injury   severity). 

The  Industry  Study's  conclusion  regarding  injury  frequency  is 
supported  by  Bureau  of  Labor  Statistics  ("BLS")  estimates  of  the 
number  of  work-related  illnesses  and  injuries  which  occur 
annually  in  the  United  States.  These  estimates  are  based  upon 
surveys  conducted  at  the  state  level  which  include  the  experience 
of  approximately  65  million  workers  in  the  private  sector.  They 
include  all  work-related  illnesses  and  injuries  --  as  opposed  to 
just  product-related  injuries  --  requiring  medical  treatment; 
involving  loss  of  time  on  the  job,  loss  of  consciousness, 
transfers  to  another  job,  restrictions  on  work  or  motion,  or 
termination  of  employment;  or  causing  fatalities.  The  estimates 
show  a  decline  in  the  number  of  work-related  illnesses  and 
injuries    from    1972    to    1975    of    12   percent. 


VI-40 


Estimates  of  Number  of  Work-Related  Illnesses 
and  Injuries  (as  defined  above) 


1971  (last  six 
months  only) 


1972 


1973 


1974 


1975 


2,934,400 


5,656,700    6,078,700   5,915,800    4,983,100 


Source:  Bureau  of  Labor  Statistics,  U.S.  Department  of 
Labor.   (Data  unavailable  prior  to  second  half  of  1971). 

The  BLS  estimates  support  the  industry  contractor's 
conclusion  that  no  trend  in  the  frequency  of  workplace  injuries 
exists  which  explains  any  increase  in  the  number  of  claims 
arising  out  of  the  workplace. 

It  should  be  noted,  however,  that  there  are  several 
limitations  to  the  industry  contractor's  conclusion.  First,  it 
identified  trends  in  workplace  injuries  on  the  basis  of  data 
supplied  by  the  New  York  State  Department  of  Labor.  These  data 
may  not  be  representative  of  national  trends. 

Second,  it  should  also  be  noted  that  the  industry  contractor 
examined  data  relating  to  Worker  Compensation  cases  closed  from 
1966  through  1972  only.  Those  data  may  not  be  relevant  to  trends 
in  the  number  of  injuries  occurring  or  product  liability  claims 
made  recently. 

Third,  there  may  be  insufficent  data  presented  to  support  the 
Industry  Study's  conclusions  as  to  injury  trends.  Regarding  the 
frequency  of  workplace  injuries,  the  industry  contractor  relied 
upon  only  the  number  of  compensation  cases  closed  in  both  1971 
and  1972  and  the  average  number  of  cases  closed  annually  during 
the  period  from  1966  through  1970  in  order  to  identify  a  trend. 
See  Industry  Study,  Table  III-3  at  III-15.  With  respect  to 
injury  severity,  data  are  presented  for  only  two  years,  1971  and 
1972.   See  Id.  at  III-15,  III-17. 


VI-41 


Consumer    Product-Related    Injuries 

According  to  data  compiled  by  the  Consumer  Product  Safety 
Commission  ("CPSC"),  the  total  number  of  product-related  injuries 
suffered  by  consumers  did  not  increase  significantly  during  the 
period  from  1973  through  1975.  Furthermore,  the  severity  of 
those  injuries  remained  stable  during  that  period.  The  number  of 
injuries  associated  with  some  target  consumer  products,  whose 
manufacturers  have  reported  difficulties  in  obtaining  affordable 
products  coverage,  however,  has  increased.  For  example,  from 
1974  to  1975  the  number  of  injuries  associated  with  the  following 
products  increased  as  indicated:  drugs,  23  percent;  lawnmowers, 
29  percent;  sporting  goods,  36  percent;  and  medical  devices,  50 
percent.      See    Industry   Study,    Table    III-7    at    III-27. 

Through  its  National  Electronic  Injury  Surveillance  System 
("NEISS"),  the  CPSC  collects  data  from  119  hospital  emergency 
rooms  concerning  injuries  associated  with  consumer  products. 
Those  data  include  information  on  injury  frequency  and  severity 
for  950  product  categories.  See  Industry  Study  at  III-22  for  a 
more    complete    description    of   NEISS. 

The  NEISS  data  on  injury  frequency  for  all  injuries  reported 
during    the    period    from    1973    through    1976    are    set    forth   below. 

NEISS   Data   on    Injuries   Associated 
With    Consumer    Products 

Total    Number    of 
Fiscal    Year  In j  ur ies    Reported 

294,702 
316,981 
339,419 
412,000 


1973 

1974 

1975 

1976 

Source:      U.S.    Consumer    Product   Safety    Commission. 

Although  there  was  a  40  percent  increase  in  the  total  number 
of  injuries  reported  to  NEISS  from  1973  through  1976  (fiscal 
year)    period,    the    Industry    Study   concluded    that   overall    there    has 


VI-42 


been  no  significant  increase  in  the  number  of  injuries  associated 
with  consumer  products.  Id.  at  III-23.  This  conclusion  was 
based  upon  the  fact  that  certain  improvements  have  been  made  in 
the  NEISS  reporting  system  which,  according  to  the  CPSC,  account 
for  much  of  this  increase. 


The  Industry  Study  also  found 
injury  severity  decreases  slightly 
(calendar  years).   Id 


that,  based  on  NEISS  data, 
from   1973   through    1975 
,  Table  III-7  at  III-27. 


As  noted  above,  the  NEISS  data  are  limited  to  injuries  which 
required  emergency  room  treatment.  Many  injuries  are  treated 
outside  that  system  through  health  clinics,  private  doctors,  etc. 
Also,  data  on  fatalities  are  not  included.  It  may  be  that  the 
NEISS  data  do  not  accurately  reflect  trends  in  consumer  product 
injuries.  On  the  other  hand,  the  increases  in  injuries 
associated  with  certain  products  may  explain  in  part  the 
substantial  increases  in   product   liability   insurance   premiums 

Q  O 

reported      by      companies    producing    those    products      .       See    p.    VI-17 
et .    seq . 

WORKER    COMPENSATION    SYSTEMS 

Introduction 

The  Briefing  Report  observed  that  because  some  workers,  by 
lawsuit,  can  shift  the  cost  of  a  work-related  accident  from  their 
employers  on  to  manufacturers  of  industrial  products,  economic 
pressure   on    Worker    Compensation    is    alleviated    to    some    extent. 

Analysis  of  the  final  version  of  the  Industry  Report  and 
other  information  that  has  come  to  the  attention  of  the  Task 
Force  permits  us  to  expand  upon  this  finding  and  the  relationship 
of  Worker    Compensation    to    product   liability. 

First,  some  persons  injured  by  products  in  the  workplace  are 
supplementing  their  Worker  Compensation  recovery  through  product 
liability   suits. 

Second,  Worker  Compensation  insurers  and  self-insuring 
manufacturers  or  distributors  are  able  to  recoup  some  of  their 
injury    compensation    costs    through    subrogation.       Although    a    number 


VI-43 


of  undocumented  assertions  have  been  made  to  the  contrary,  the 
amount  recovered  in  these  subrogation  actions  does  not  appear  to 
be  significant  relative  to  the  total  amount  paid  out  by  Worker 
Compensation  insurers.  One  can  not  generalize  as  to  whether 
employers  who  purchase  Worker  Compensation  insurance  benefit 
(through  a  reduction  or  leveling  of  their  Worker  Compensation 
premiums)  from  these  subrogation  actions.  With  respect  to  those 
who  self-insure,  the  system  could  reduce  incentives  for  workplace 
safety . 

Third,  according  to  some  representatives  of  insurance 
industry,  product-related  accidents  in  the  workplace  have  been  a 
significant  cause  of  the  rise  in  product  liability  premium 
increases    incurred    by  manufacturers   of    industrial    equipment. 

Analysis 

Employee  Product  Liability  Litigation 

Some  employees  who  are  injured  in  product-related  accidents 
in  the  workplace  are  able  to  augment  substantially  the  benefits 
available  from  Worker  Compensation  through  product  liability 
litigation.  This  additional  compensation  could,  in  theory,  have 
the  effect  of  diminishing  the  economic  and  political  pressures 
for  increasing  Worker  Compensation  benefit  schedules,  which,  in 
turn,  may  lessen  the  need  for  increased  Worker  Compensation 
insurance  premiums. 

Normally,    when   an   employee   is   injured   in   a   workplace 

accident,  that  person  is  paid  benefits  according  to  the  statutory 

benefit   schedule   of  the  Worker  Compensation  system  of  the  state 

in  which  he   is   employed.    The   statutory   schedules   typically 

provide    for    benefits    which    are    smaller    than    the    damages    which   are 

potentially   recoverable      in      the      tort-litigation      system.  For 

example,      injured    employees    are    usually   not    fully   compensated    for 

their    pecuniary    losses*    nor    are      they      directly      compensated      for 

pain      and      suffering.  In      fact,      despite    significant   gains    in 

benefit    levels,    the    benefit    schedules    in    effect      in      many      states 

remain         well      below      the      levels      recommended      by      the      National 

91 
Commission    on    State    Workmen    Compensation    Laws    in    1972. 


VI-44 


An  employee  injured  in  a  product-related  accident  in  the 
workplace  has  a  chance  to  increase  these  benefits  by  bringing  a 
claim  against  the  manufacturer  of  the  product  that  injured  him. 
Because  of  the  contingent  fee  system,  he  may  exercise  this 
opportunity  at  little  or  no  cost  to  himself. 

Employees  in  this  position  are  having  an  impact  on  product 
liability  insurance.  First,  some  surveys  suggest  that  more 
injured  employees  are  resorting  to  product  liability 
litigation.  Second,  preliminary  data  from  the  ISO  Closed  Claim 
Survey  indicate  that  approximately  50  percent  of  the  total 
insurance  payments  for  product  liability  were  made  to  employees 
injured  in  workplace  accidents.  Third,  company  claims 
adjusters  reporting  to  ISO  believe  that  approximately  30  percent 
of  those  payments  were  made  for  injuries  which  may  have  been 
caused,  in  part,  by  employer  negligence.  Nevertheless,  the 
employers  were  not  brought  into  the  action  because  most  states 
grant  them  immunity  from  this  type  of  suit. 

It  should  be  realized,  however,  that  the  number  of  successful 
product  liability  claims  brought  by  workers  ig^a  small  percentage 
of  the  total  number  of  workplace  injuries.  Therefore,  it  is 
not  possible  to  conclude  that  the  possibility  of  these  suits  has 
lessened  economic  or  political  pressure  for  increasing  Worker 
Compensation  statutory  benefit  schedules. 

On  the  other  hand,  some  observers  have  asserted  that  an 
increase  in  Worker  Compensation  benefit  levels  would  reduce  the 
number  of  product  liability  claims  that  arise  out  of  workplace 
accidents.  There  are  no  data  to  support  this  assertion.  The 
little  evidence  that  is  available  suggests  that  the  two  phenomena 
are  independent  variables  within  certain  ranges  of  benefit 
levels.  To  the  extent  that  they  are  independent,  an  increase 
in  benefit  levels  would  not  be  an  effective  means  of  reducing  the 
number  of  workplace  product  liability  claims  against 
manufacturers . 

This  suggests  that  if  it  is  desired  to  reduce  the  number  of 
product  liability  claims  against  manufacturers  of  industrial 
goods,  other  alternative  remedies  must  be  considered.  One  such 
alternative  would  be  to  make  Worker  Compensation  a  sole  source 
remedy   for   persons   injured  by  products  in  the  workplace.   This 


VI-^5 


report  provides  an  analysis  of  that  alternative  at  pp.  VII-103  - 
112.  One  must  also  consider  whether  product  manufacturers  should 
be  given  the  right  to  place  an  appropriate  portion  of  the  tort 
law  costs  of  a  product-related  accident  on  a  negligent  employer. 
While  this  would  not  reduce  the  number  of  workplace  product 
liability  claims,  it  would  prevent  the  employer  from  being  able 
to  externalize  the  cost  of  a  work-related  product  injury.  An 
analysis   of   this    proposal    is    at    p.    VlI-70  _et_.    seq . 

Subrogation 

Subrogation  is  the  right  of  a  party  who  has  paid  the  losses 
of  an  injured  person  to  sue,  or  otherwise  be  reimbursed  by,  a 
third  party  who  is  responsible  under  tort  law  for  the  injury  in 
question . 

Subrogation      may      affect      Worker      Compensation      insurance      by 

enabling    some   employers    who    self-insure    with      respect      to      Worker 

Compensation      and    Worker    Compensation    insurance   carriers    to    shift 

some   of   the    cost   of   compensating      injured      employees      to      product 

993 
manufacturers    and    their    product    liability   carriers.  Under    the 

law  of  most    states,    this    can    occur      even      though      the      employer's 

negligence   contributed   to   the   happening  of  the  accident.   See 

p.  VII-97. 

There  is  little  information  regarding  the  aggregate  costs 
shifted  from  the  Worker  Compensation  system  to  product  liability 
through  subrogation.  A  survey  completed  in  1976  by  Teknekron, 
Inc.,  on  behalf  of  the  Interdepartmental  Task  Force  on  Workers' 
Compensation,  indicates  that  the  insurance  carriers  surveyed 
subrogated  between  two  and  three  percent  of  all  Worker 
Compensation  loss  payouts  during  the  period  from  1971  to  1973: 
these  percentages  are  not  limited  to  subrogation  of  product 
liability  lawsuits.  Nevertheless,  applying  them  to  the  Teknekron 
estimate  of  $3.2  billion  in  total  Worker  Compensation  payments  in 
1975,  the  total  amount  of  subrogation  in  1975  for  all  workplace 
injuries  would  be  between  $64  million  and  $96  million. 
Unfortunately,  there  are  no  data  available  which  indicate  the 
total  costs  actually  shifted  to  product  manufacturers  and  their 
product  liability  insurance  carriers  through  Worker  Compensation- 
related  subrogation. 


VI-U6 


Two  other  surveys  indicate  that  the  impact  of  subrogation 
upon  Worker  Compensation  insurance  premiums  may  be  limited. 
First,  according  to  an  estimate  derived  from  the  California 
Worker  Compensation  Study,  product-related  workplace  injuries  may 
represent  only  28  percent  of  all  Worker  Compensation  claims 
Therefore,  subrogation  in  product  liability  would  not  be 
available  with  respect  to  the  costs  incurred  in  approximately  72 
percent  of  Worker  Compensation  claims.  That  study  did  not 
indicate  what  percentage  of  the  product-related  claims  were 
actually  subrogated  or  what  the  total  amount  of  subrogated  costs 
was.  Second,  the  AMIA  Survey  of  large  ($100,000+)  claims  closed 
during  1975  found  that  only  a  small  percentage  --  five  percent  -- 
of  the  total  product  liability  payments  analyzed  in  that  survey 
were    successfully   subrogated. 

It  is  a  matter  of  conjecture  as  to  what  percentage  of  the 
total  Worker  Compensation  costs  are  shifted  through  subrogation 
to  product  liability.  It  would  seem  from  the  foregoing  data  that 
the  implicit  subsidy  of  Worker  Compensation  premiums  through 
product      liability    subrogation    is    not   major.  Nevertheless,    in 

a  limited  sphere,  subrogation  claims  increase  friction  costs. 
Also,  under  the  law  in  a  majority  of  states.  Worker  Compensation 
insurance  carriers  (and  sel f- insur ing  employers)  may  be  able  to 
externalize  the  cost  of  a  product-related  accident  brought  about, 
in  part,  by  negligent  conduct  on  the  part  of  the  employer. 
Remedies  that  would  modify  subrogation  rights  of  Worker 
Compensation  carriers  are  analyzed  at  p.  VII-95  at  p.  77  et_.  s_eq. 
seq . 

PRODUCT  LIABILITY  LOSS  PREVENTION 

Introduction 

Prior  to  our  study,  some  sources  had  observed  that  the  tort- 
litigation  system  probably  has  had  little  or  no  effect  on 
manufacturers  or  insurers  with  respect  to  product  liability  loss 
prevention.  The  Briefing  Report  found  to  the  contrary:  the 
tort-litigation  system  and  increased  product  liability  insurance 
premiums  have  caused  a  number  of  manufacturers  and  insurers  to 
devote   more    time    and    resources    to    product    liability    prevention. 


VI-47 


The  final  version  of  the  Industry  Study  and  other  information 
that  has  come  to  the  attention  of  the  Task  Force  reaffirms  this 
finding  and  also  permits  a  more  precise  description  of  the  nature 
and    scope    of   this    impact. 

In  that  regard,  the  data  show  that  a  much  higher  percentage 
of  large  companies  have  implemented  formal  product  liability  loss 
prevention  programs  than  small  firms.  Also,  insurers  appear  more 
willing  and  able  to  provide  product  liability  advice  to  large 
rather  than  small  insureds  --  some  small  loss  prevention  firms 
received  no  assistance  in  1975  and  1976.  In  spite  of  all  this, 
many  small  insureds  are  concerned  and  utilize  product  liability 
loss    prevention    techniques. 

Although  product  liability  loss  prevention  appears  to  be  more 
important  to  an  increasing  number  companies,  there  are  some 
manufacturers  in  some  industries  that  could  improve  in  this  area. 
As  discussed  at  length  in  Chapter  I,  we  have  identified  unsafe 
manufacturing  practices  as  one  of  the  principal  causes  of  the 
product  liability  problem.  We  analyze  what  insurers,  government 
and  manufacturers  can  do  to  correct  these  practices  at  p.  VII-172 
et .    seq . 

We  note  that  some  manufacturers  believe  that  there  is  no 
relationship  between  their  investment  in  product  liability  loss 
prevention  and  a  reduction  or  leveling  of  their  product  liability 
insurance    premiums.      We    discuss    this    problem    at    p.    VII-177. 

Although  product  liability  problems  have  not  provided  an 
incentive  for  all  manufacturers  to  devote  more  attention  to 
product  liability  loss  prevention,  policymakers  must  be  cautious 
not    to    undermine    rational    incentives    that   do    exist. 

An  analysis  of  the  data  and  other  information  we  have 
collected  regarding  manufacturers'  and  insurers'  efforts  at 
product    liability    prevention    follows. 


VI-48 


Analysis 

Product    Manufacturers'    Loss    Prevention    Programs 

The  product  liability  loss  prevention  programs  of  the  firms 
responding  to  the  Industry  Study  telephone  survey  have  been 
described       in      Chapter    IV.       See      p.    IV-3    e_t.    seq .  That    survey 

suggested  that  firms  vary  as  to  their  perceptions  of  what 
constitutes  such  a  loss  prevention  program  --  as  opposed  to  the 
ordinary  manufacturing  practices  --  and  of  which  elements  of 
those  programs  are  most  effective  in  minimizing  their  product 
liability.  For  example,  while  some  small  businesses  are  more 
sensitive  to  the  need  for  product  liability  loss  prevention 
techniques  than  larger  ones,  the  telephone  survey  indicated  that 
the  percentages  of  firms  which  assessed  the  impact  of  "product 
design  and  engineering"  and  "product  manufacturing  and  quality 
control"  as  being  "not  applicable"  to  or  of  little  impact  upon 
product    safety   were    inversely   related    to    firm    size. 


The  Industry  Study's  telephone  survey  also  indicated  that 
some  firms  have  implemented  what  they  consider  to  be  special  loss 
prevention  programs.  Thirty-seven  percent  of  the  firms  surveyed 
indicated  that  thev  had  special  programs  to  reduce  their  product 
liability   claims.  Another    18    percent   of   the    responding    firms 

stated    that    they   were    considering    implementing    such      programs. 
Large      firms      were      much      more      likely      to      have    implemented    such 
programs    than    small    firms,      as      is      evident      from      the      following 
program      adoption    rates:      small    firms,    19.^    percent;    medium-sized 
firms,    38.7    percent;    and    large    firms,       51.3      percent.  Seventy 

percent      of      the    firms    with    such    programs    indicated    that    they   had 
started    the    programs    prior    to    1974. 


The      most      common      approaches      undertaken      in      these      special 
programs    were:         (1)       augmented      qual ity    oControl  ,       (2)       improved 


labeling,      and 

19 


(3)      product      redesign. 


These    three    techniques 


were    also    viewed      as      having      a      significant      impact      on      product 


safety . 


A  high  percentage  of  firms  in  certain  industries,  such  as 
industrial  machinery,  have  recognized  the  need  for  implementing  a 
special  program  directed  at  product  liability  loss  prevention  and 
for    giving    that    program    the    full    support   of   top   management.         For 


VI-M9 


example,  the  MAPI  Survey  found  that  79  percent  of  the  responding 
firms  have  assigned  specific  responsibility  for  product  liability 
to  an  individual  or  _ad  hoc  committee.  Furthermore,  in  the 
vast  majority  of  cases,  that  individual  or  committee  reported 
directly  to  a  member  of  senior  management. 

It  should  be  noted  that  the  threat  of  large  product  liability 
judgments  may  also  have  caused  a  shift  in  the  focus  of  industry 
research  and  development  programs  toward  product  liability  loss 
prevention  techniques.  However,  further  research  would  be 
necessary  to  confirm  this  hypothesis. 

While  these  general  trends  exist,  we  cannot  describe  the 
exact  effect  the  tort-litigation  system  is  having  upon  product 
safety . 

First,  it  is  difficult  on  the  basis  of  surveys  to  distinguish 
real  increases  in  the  commitment  of  product  manufacturers  to 
product  liability  loss  prevention  from  perceived  changes  in  that 
commitment.  It  may  be  that  some  routine  tasks,  such  as  product 
design,  which  have  always  been  performed  to  some  degree  as  a 
necessary  part  of  the  manufacturing  process,  are  now  recognized 
as  being  product  liability  loss  prevention  techniques.  This 
applies  as  well  to  the  firms  which  have  implemented  "special" 
loss  prevention  programs.  Thus,  it  may  be  that  company 
perceptions  of  routine  tasks,  as  well  as  company  loss  prevention 
programs,  have  changed. 

Second,  our  data  do  not  provide  an  exact  measure  of  the 
resources  allocated  to  product  liability  loss  prevention  programs 
firm    by    firm    over    an    extended    period    of   time. 

Third,  qualitative  differences  in  loss  prevention  programs 
are  not  easily  measured.  For  example,  the  fact  that  a  company 
has  such  a  program  does  not  indicate  that  program's  effectiveness 
or  the  relative  importance  of  loss  prevention  considerations  in 
management   decisions. 

In      sum,      the      overall    picture    is   one    showing  the    tort    system 

and    rising    product    liability    premiums   as    having    a  positive    impact 

on  product  liability  loss  prevention,  but  it  is  not  possible  to 
quantify    the    amount    on    an    industry-wide   basis. 


VI-50 


Insurance    Company    Loss    Prevention    Services 


Many  insurance  companies  state  that  they  have  increased  their 
efforts  to  provide  product  liability  prevention  advice  to  their 
insureds.  These  services  are  usually  provided  as  part  of  the 
underwriting    process. 

Not  all  insureds,  however,  receive  specific  insurance  company 
loss  prevention  services.  The  Industry  Study's  telephone  survey 
found  that  only  68  percent  of  the  firms  surveyed  which  carried 
product  liability  insurance  had  been  inspected  by  insurance 
company    loss    prevention    engineers    in    1975    or    1976.  Of    the    195 

firms  which  had  been  inspected,  only  82  (42  percent)  reported 
that  their  carriers  had  made  specific  recommendations  for 
reducing  claims.  Thus,  71  percent  of  the  286  firms  surveyed  with 
product  liability  coverage  did  not  receive  any  specific  product 
liability  loss  prevention  advice  from  their  carriers  during  that 
1975-1976   period. 


Furthermore,  both  the  Industry  and  Insurance  Studies  found 
that  small  businesses  were  less  likely  to  be  inspected  by  their 
insurers  than  were  large  firms.  The  Industry  Study's  telephone 
survey  found  that  only  54  percent  of  the  small  firms  surveyed 
with  product  liability  coverage  had  been  inspected  during  the 
1975-1976    period.^    ^ 

The  underwriting  file  survey  conducted  by  the  insurance 
contractor  also  showed  that  a  higher  percentage  of  large  firms 
are  inspected  than  are  small  firms.  The  insurance  contractor, 
however,  concluded  from  its  interviews  with  insurance  company 
officials   that    this    imbalance    is   being    corrected. 

Thus,  it  appears  that  small  firms,  some  of  which  lack  the 
financial  resources  or  technical  knowledge  to  implement  adequate 
product  liability  loss  prevention  programs  on  their  own,  are 
receiving  fewer  product  liability  loss  preventive  services  than 
are    large    firms. 

Perhaps  the  most  interesting  information  reported  regarding 
the  impact  of  insurance  company  efforts  in  this  area  are  the 
results  of  the  selected  firm  interviews  conducted  by  the  industry 
contractor.      Those    interviews    indicated    that:       (1)    the      insurance 


VI-51 


carriers  of  the  20  firms  surveyed  made  no  recommendations 
regarding  product  safety  and  manufacturing  processes;  and  (2) 
perhaps  more  importantly,  the  surveyed  firms  perceived  no 
demonstrable  relationship  between  their  loss  preyention  programs 
and      their      product      liability      insurance    costs.  The    insurance 

contractor  observed  that  insurance  companies  do  occasionally 
consider  the  product  liability  prevention  techniques  of  would-be 
insureds,  among  other  factors,  in  making  their  underwriting 
decisions . 

The  perceptions  reported  during  the  selected  firm  interviews, 
though  statistically  insignificant,  are  important  because  they 
suggest  that  insurance  companies  may  be  able  to  be  of  more 
assistance  with  regard  to  their  insureds'  loss  prevention 
programs.  Also,      where      manufacturers      do      not      perceive      that 

investment  in  product  safety  will  earn  a  satisfactory  return 
through  cost  savings,  they  may  be  disinclined  to  devote 
substantial  time  and  resources  to  product  liability  loss 
prevention.  While  insurance  costs  are  only  one  element  of  the 
potential  savings  from  such  investments,  the  lack  of  any 
perceived  correlation  between  these  two  variables  may  be 
indicative  of  the  need  for  modification  of  the  present  insurance 
rating  system.  See  p.  VII-177  for  an  analysis  of  remedial 
proposals    that    address    this    problem. 

SUMMARY   OF    CONCLUSIONS 

Availability   of    Product    Liability    Insurance 

Total    Unavailabil ity 

There  is  no  widespread  problem  of  product  liability  insurance 
being  unavailable.  A  few  companies  in  our  target  industries  and 
other  high-risk  product  lines  are  having  difficulty  obtaining 
product  liability  insurance.  For  some  others,  product  liability 
rates  would  appear  to  be  unaffordable  --  it  has  been  persuasively 
argued  to  the  Task  Force  that  this  is  a  practical  equivalent  of 
unavail abil ity . 


VI-52 


Partial  Unavailabil ity 

Pol  icy  limitations 

Policy  limitations  that  insurance  companies  have  been  willing 
to  offer  for  products  coverage  do  not  appear  to  have  changed 
significantly  since  1971.  Thus,  insurance  companies  are  not 
forcing  insureds  to  retain  more  risk  by  reducing  the  amount  of 
coverage  that  they  are  willing  to  make  available.  On  the  other 
hand,  some  underwriters  are  reluctant  to  increase  the  limits  of 
liability  for  existing  coverage.  Thus,  some  manufacturers  whose 
products'  risk  exposure  appears  to  be  increasing  may  be  unable  to 
protect  themselves  against  that  increase  by  raising  the  limits  of 
their  products'  coverage. 

Coverage  restrictions 

Task  Force  information  sources  were  not  wholly  in  accord  on 
the  question  of  whether  coverage  restrictions  were  increasing. 
The  Industry  Study  found  restrictions  on  products  coverage  to  be 
more  prevalent  than  the  Insurance  Study,  which  concluded  that 
coverage  exclusions  are  rarely  imposed  by  insurance  companies. 
Major  product  liability  insurers  appear  to  be  willing  to  write 
coverage  for  most  product  lines.  Smaller  insurance  companies  may 
exclude  some  very  high-risk  products  from  their  General 
Comprehensive  Liability  coverage. 

Deductibles 

Deductibles  appear  to  be  increasingly  prevalent  among 
our  target  industry  groups.  Furthermore,  the  levels  of 
deductibles  appear  to  have  increased  significantly  between  1975 
and  1976  for  both  large-  and  medium-sized  firms  in  our  target 
industry  groups.  This  increase  in  the  frequency  and  level  of 
deductibles  may  be  a  matter  of  choice  on  the  part  of  insureds 
rather    than    a    requirement   of   the    insurance   companies. 

Af fordabil ity   of   Product    Liability    Insurance 
As    It    Affects    Insureds 

There  has  been  a  substantial  increase  in  the  cost  of  product 
liability  insurance  since  197^  in  all  of  the  Task  Force's  target 
industries.         The      increase      in      premiums      appears      to      have   been 


VI-53 


greater  for  small  as  compared  to  large  businesses.  Also,  small 
firms  appear  less  able  to  cope  with  af fordability  problems  than 
large  firms.  Certain  industries  appear  to  have  been  subject  to 
very  substantial  increases.  These  include  manufacturers  of 
medical  devices,  pharmaceuticals,  power  lawnmowers,  industrial 
chemicals  and  metal  castings.  Anecdotal  data  show  similar 
impacts  on  manufacturers  of  sporting  goods  and  ladders.  In  some 
instances  manufacturers  --  especially  of  durable  goods  --  may  not 
be  able  to  pass  this  increased  cost  on  to  their  customers. 

As  It  Affects  the  Price  of  Products 

One  cannot  readily  measure  the  exact  cost  of  product 
liability  insurance  as  part  of  the  price  of  a  product.  The 
average  cost  of  product  liability  insurance  is  less  than  one 
percent  of  sales  in  most  of  the  Task  Force's  target  industries, 
but  it  is  higher  for  some  manufacturers.  The  total  cost  of 
product  liability  insurance  as  it  affects  the  price  of  a  product 
may  be  above  the  one  percent  figure  because  distributors  and 
retailers  may  also  pass  on  the  cost  of  their  product  liability 
insurance  to  purchasers.  Furthermore,  other  product  liability 
costs,  in  addition  to  product  liability  premiums,  may  be 
reflected    in    the    price   of   a    product. 

Product    Introduction    and    Discontinuation 

Product  liability  problems  in  the  pharmaceutical  and  other 
high-risk  product  lines  may  reinforce  trends  against  new  product 
development  with  the  result  that  some  socially  beneficial 
products  may  never  be  developed  or  may  be  discontinued.  This  is 
especially  true  for  smaller  firms.  On  the  other  hand,  some  of 
the  products  that  are  not  produced  (or  are  discontinued)  may  be 
ones  whose  potential  for  causing  harm  outweighs  their  social 
utility.      This    is    an    area    that   deserves    further    investigation. 

Business    Failures 

Product  liability  problems  do  not  appear  to  have  been  a 
direct  and  sole  cause  of  business  failures.  On  the  other  hand, 
circumstantial  evidence  suggests  that  substantial  product 
liability  premium  increases  may  be  one  of  several  factors  that 
cause      small    businesses    in    high-risk    product    industries    to    go   out 


VI-5M 


of   business.       In    the    future,    some    small    businesses   may   be      placed 
in    default   by    product    liability    judgments. 

Trends    in    the    Number    of    Product    Liability    Claims 

No  organization,  public  or  private,  currently  records  all 
product  liability  claims  or  lawsuits.  The  best  "estimate"  of  the 
number  of  product  liability  claims  filed  in  1976  is  between 
60,000  and  70,000.  Data  are  not  available  that  would  provide  a 
firm  indication  of  the  trends  in  the  number  of  product  liability 
claims  in  the  197^-1976  period.  In  our  target  industries,  the 
average  number  of  pending  claims  appears  to  have  increased 
substantially   between    1971    and    1976. 

Compensation    Obtained    by    Persons    Injured    by    Products 

A  small  percentage  of  persons  injured  by  products  file 
product  liability  claims.  There  is  little  information  available 
regarding  the  compensation  obtained  by  claimants,  although,  a 
preliminary  closed  claim  survey  suggests  that  a  relatively  high 
percentage  receive  their  medical  expenses,  wage  losses  and  other 
out-of-pocket  expenses  other  than  legal  fees.  The  preliminary 
closed  claim  data  and  other  data  sources  suggest  that  less  than 
six  percent  of  product  liability  claims  are  litigated  to  a  final 
court  verdict.  Of  those  who  litigate  cases,  less  than  50  percent 
recover    any   damages. 

The    Relationship    Between    Product    Liability 
Claims    and    Product    Accidents 

Limited  data  collected  by  our  Industry  Study  suggest  that  any 
increase  in  product  liability  claims  in  the  majority  of  our 
target  industries  is  not  due  to  an  increase  in  the  number  of 
product- related  accidents.  This  finding  appears  to  be  firmer  in 
regard    to    workplace    products    than    consumer    products. 

Worker    Compensation    Systems 

Some  persons  injured  by  products  in  the  workplace  are 
supplementing  their  Worker  Compensation  recovery  by  the  use  of 
product  liability  suits.  Worker  Compensation  insurers  and  self- 
insuring    manufacturers   or    distributors    are    able    to    recoup    some   of 


VI-55 


their  injury  compensation  costs  through  subrogation  in  product 
liability  claims.  These  claims  would  appear  to  have  only  a  very 
minor  impact  on  the  Worker  Compensation  system.  Insurers  stress 
that  workplace  accidents  and  resultant  product  liability  claims 
have  been  an  important  cause  of  the  product  liability  insurance 
rate  increases  that  have  been  generated  for  industrial  products 
within    our    target    groups. 

Product    Liability    Loss    Prevention 


The  tort-litigation  system  and  increased 
insurance  costs  have  caused  many  manufactur 
products  to  devote  more  time  and  resources  to 
loss  prevention;  however,  a  number  of  such  bus 
done  so.  Limited  data  show  that  a  much  hi 
large,  as  opposed  to  small  manufacturers, 
product  liability  loss  prevention  programs, 
appear  to  have  supplied  product  liability  advic 
to  large  insureds  than  to  small  ones.  In 
executives  interviewed  by  the  industry  con 
perceive  a  direct  correlation  between  the 
product  liability  loss  prevention  programs  and 
insurance   costs. 


product  liability 
ers      of      high-risk 

product  liability 
inesses  have  not 
gher    percentage   of 

have      implemented 

Also,      insurers 

e   more      frequently 

addition,  company 
tractor      did         not 

implementation  of 
a      reduction      in 


VI-56 


lOTES  TO  CHAPTER  VI 


(1976) 
(1976) 

2 

Th 

Study, 
underwr 
data  on 
whether 
renew  h 
with  i 
produci 
reluc ta 
which  a 

3se 
were  ci 
Insurer 
hazardo 
loss  e 
at  ES-6 


rveys   by   the   Independent   Insurance 
(identifying   132);   The   Professiona 
(  identifying  147). 

is  was  due  in  part  to  the  research  des 

For  example,  the  insurance  contractor 

iters   and  its  underwriting  survey  did 

this  subject  because  underwriters  typ 

a  prospective  insured  whom  they  have 

as  been  able  to  obtain  coverage  elsewh 

nsurance   brokers   were   also   relativ 

ng  such  evidence.   This  was  due  in  lar 

nee   of   brokers   to  divulge  informati 

re  "going  bare."   Insurance  Study  at  3 

e  Jd_.,   Exhibit   A-1   at  3-7  for  a  li 
ted  as  those  underwritten   only   after 
s    were   very   reluctant   to   insure 
us  products  or  to  renew  policies   for 
xperience  or  with  products  with  large 


Agents   o 
1   Insuranc 


ign  of  the 
' s   in terv  i 

not  reveal 
ically    did 

refused  to 
ere  .  It s  i 
ely  unprod 
ge  measure 
on  regardin 
-6. 

st    of    produ 
c  ar ef ul 
new      accou 
insur  ed  s 

loss  exposu 


f  America 
e   Agents 


Insurance 
ews   with 

any  hard 
not   know 

cover  or 

nterviews 

uc  ti  v  e  in 

to   the 

R  clients 


cts  which 
scrutiny . 
nts  with 
with  bad 
r es  .   Id  . 


There  is  an  inconsistency  in  the  Insurance  Study  regarding 
the  number  of  firms  identified  by  name  that  could  not  obtain 
products  coverage  because  it  was  either  unavailable  or 
unaf fordable .  The  Executive  Summary  to  the  Insurance  Study 
states  that  the  number  was  62,  while  Chapter  III  uses  the  num.ber 
7^.  Id.  at  3-14.  According  to  the  Technical  Representative  of 
the  Contract  Officer  for  the  Insurance  Studv,  the  correct  number 
is  62. 


The   various  trade  associations  reported  a  total  of  110  firms 


without  coverage,  but  they  did 
there  was  no  way  of  knowing  the 
two  groups.  _I^.  at  3-4  -  3-14. 

^NFIB  Survey,  Table  1  at  4. 


not   identify   them.    Therefore, 
extent  of  any  overlap  between  the 


Id. 

7 
See  Statement  of  J.  F!ack,  representing  the  NMTBA  in  Hearings 

on  Product  Liability  Problems  Affecting  Small  Business  Before  the 

Senate   Select  Committee  on  Small  Business,  94th  Cong.,  2d  Sess;, 

pt.   1,   at   466   (9/8/76);   Letter   to   Task   Force   from    FEMA 

( 10/21/76) . 

o 

Id  .  (unspecified  number  of  NMTBA  members);  Letter  to  Task 
Force  from  FEMA  (10/21/76)  (eight  percent  of  226  usable 
responses) . 


VI-57 


Q 

See  Insurance  Study  at  3-11.  See  also  Statement  of  Judge 
Ned  Price,  Advisory  Committee  on  Product  Liability,  Fourth 
Meeting,  p.  32  (6/27/77). 

See  Statement  of  Lester  L.  Rawls,  Comimissioner  of  Insurance 
of  the  State  of  Oregon  and  the  President  of  the  NAIC,  in  Hearings 
on  Product  Liability  Insurance  Premium  Increases  Before  the 
Subcommittee  on  Capital,  Investment  and  Business  Opportunities, 
House  Committee  on  Small  Business,  95th  Cong.,  1st  Sess.,  pp.  20- 
21  (6/30/77). 


1  1 


cond  u 
the 
which 
new  p 
to  Am 
Insur 
The  C 
surve 
probl 

1 
Liabi 

1 
Rawl  s 

1 

con  tr 
did 
prohi 
corre 
of  th 

1 

Third 

1 


of    Missouri's    survey). 

concluded       from      that 

insurance    availability 


Id .  In  addition,  the  Missouri  Division  of  Insurance 
cted  a  survey  which  indicated  that,  as  of  August  2,  1976, 
vast   majority   (85   percent)   of  the  146  insurance  carriers 

write  products  coverage  in  Missouri  were  willing  to   write 
roducts  coverage  and  to  renew  existing  coverage.   See  Letter 
erican  Mutual  Insurance  Alliance  from  Texas  State   Board   of 
ance   (8/26/76)   (describes   results 
ommissioner  of  Insurance  of   Missouri 
y  that  there  was  no  product  liability 
em  in  Missouri  at  that  time. 

2 
See   Remarks   of  D.  McNamara,  Advisory  Committee  on  Product 

lity,  Fourth  Meeting,  p.  35  (6/27/77). 

See  Remarks  of  J.  Mack,  ld_.  ,  at  35-36;  Statement  of  Lester 
,  supr  a  at  21 . 

As  was  described  in  the  preceding  discussion,  the  insurance 
actor  was  able  to  identify  only  62  companies  by  name  that 
not  have  products  coverage  because  of  its  unavailability  or 
bitive  cost.  Its  sources  of  inform.ation  included  the 
spondence  received  by  the  Task  Force  prior  to  the  completion 
e  Insurance  Study. 


17 


See      Transcripts,       Advisory    Committee    on    Product    Liability, 
and    Fourth    Meetings    (1/11/77,    6/27/77). 

See    Industry    Study    at    IV-36,    and    Table    IV-16    at    IV-38. 

Id . ,    Table    IV-37    at    IV-70. 


Insurance    Study    at    3-12. 


1  9 

See       Remarks      of      Robert      Clements,       Senior    Vice    President, 

Marsh      and      McLennan,       Inc.,       Advisory         Committee        on         Product 

Liability,       Second      Meeting,       pp.       21-22       (11/1/76),       and       Fourth 

Meeting,    p.    47    (6/27/77). 

For  example,  see  Letter  to  Task  Force  dated  1/31/77 
(manufacturer  of  medical  equipment  which  has  been  unable  to  get 
more  than  $1  million  in  products  coverage--a  level  its  president 
considers    to    be    inadequate). 


20 


VI-58 


?  1 

The  Machine  and  Allied  Products  Institute's  1976  Survey 
reported  that  159  of  the  173  respondent  companies,  or  92  percent, 
considered  their  coverage  to  be  adequate.   See  MAPI  Survey  at  19. 


conducted   by   the   Kansas   State   Insurance 
subject   of   the   availability   of    product 


^^1976  Survey 
Department  on  the 
liability  insurance. 

-^In   three   of   those   files,  however,  the  excluded  products 
were  covered  by  separate  policies.  Insurance  Study  at  1-15,   3-11 


12.    More   generally, 
products  coverage  offered 


it   found  very 
Id.  at  3-1 1  - 


little  variation  in  the 
13. 


24 


25 


Id.  at  3-6  -  7 


See  Industry  Study,  Table  IV-18  at  IV-41. 

See   Responses   of   the   respective   companies  to  Questions 
propounded   by   the   Subcommittee   on   Capital,   Investment    and 


26 


of   the   House  Small  Business  Committee; 

14   (6/28/77);   Liberty   Mutual,   p.   12 

>.   3   (6/20/77);   Crum   and  Foster,  p.  7 


Business   Opportunities 
Responses:   Hartford,  p 
(6/28/77);   St.   Paul, 
(7/15/77)  . 

27 

Responses   to   Questions   of   the   Subcommittee  on  Capital, 

Investment  and  Business  Opportunities  of  the  House   Com.mittee   on 

Small   Business   submitted  by  the  Hartford  Insurance  Group,  p.  16 

(6/28/77)  and  by  Liberty   Mutual   Insurance   Company,   pp.   14-15 

(6/28/77) . 


2! 


Id. 


29, 
30. 


IMTBA  Survey  at  C-87 


^d 
30a 


30b 


31 


Id 


Id 


at  C-92. 
at  C-87. 
at  C-92. 


See  Industry  Study,  Table  IV-15  at  IV-37;  or  Chapter  III  of 
this  report,  Table  III-9  and  p.  III-12. 

32 

MAPI   Survey   at   21.    The   term  "Retrospective  retention" 

refers  to  the  rating  plans  which  provide  for   the   adjustment   of 

the   current  policy  premium  to  reflect  losses  incurred  during  the 

term  of  the  policy.   See  Insurance  Study  at  1-30. 

33 

See   Chapter   III   of   this  report  at  III-10  -  12;  Industry 

Study  at  IV-29  -  IV-40,  IV-72  -  IV-74. 

3  3a 

For      example,    see    Statement    of    Howard    J.    Bruns,    President, 

Sporting    Goods    Manufacturers      Association,       Hearings      on      Product 


VI-59 


Liability  Problems  Affecting  Small  Business  before  the  Senate 
Select  Committee  on  Small  Business,  94th  Cong.,  2d  Sess.,  pt  .  1, 
p.  532  (1976)  (premium  increases  of  450  percent  in  1975  for 
manufacturers  of  equipment  for  sports  teams);  Statement  of  Harold 
B.  Halter,  Executive  Vice  President,  Farm  Equipment  Manufacturers 
Association,  _Id^.,  pt.  1A,  p.  1417  (1976)  (300  percent  increase  in 
last  12  months  in  premiums  paid  by  members  responding  to  its 
survey)  . 


brou 
whol 
prod 
beca 
prod 


IS  s 

for 


Liab 
from 


Sine 
ght 
esal 
uc  t 
use 
uc  ts 

34 
^  Th 

ubst 

a  si 

35se 
ilit 

Mr. 


e  the  publication  of  the  Briefing  Report,  informa 
to  the  attention  of  the  Task  Force  suggesting  th 
er-distr ibutor s  of  products  have  experienced  incr 
liability  premiums.  This  is  an  important  dev 
of  the  pyramidal  effect  it  can  create  on  the 
for  consumers.   See  Chapter  VI,  p.  7. 

e  analysis  for  a  firm  which  sells  more  than  one 
antially  more  complex,  but  its  objectives  are  the 
ngle-product    firm. 

e    Remarks    of    Joseph    McEwen,    Advisory    Committee    on 
y.    Fourth    Meeting,    p.    25    (6/27/77);    letter    to    Tas 
McEwen    (9/2/77). 


tion  was 
at  some 
eases  in 
elopmen  t 
cost    of 


prod  uc  t 
same    as 


Produc  t 
k   Force 


36 


As   explained   in   the  Insurance  Study,  the  term 


rate 
the 


Chap 

its 

(Exh 

numb 

sale 

comp 


rate 

ter 

cal 
ibit 
er 

s  ,  a 
ared 


means  that  these  product  categories  are  rated  acco 
manual  published  by  ISO.   See  Insurance  Study  at 

e  amount  of  coverage  provided  for  in  Exhibi 
V  differs  from  that  used  by  the  insurance  contra 
culations  of  applied  rates  as  a  percentage  o 
s  C-1  and  C-2  of  the  Insurance  Study).  Therefo 
of  product  categories  whose  rates  exceed  one  pe 
s  set  forth  in  Exhibit  V-6  of  Chapter  V,  ca 
with  the  data  in  Exhibits  C-1  and  C-2. 


anual 1 y- 
rding  to 
1-36. 

t  V-6  of 
ctor  in 
f  sales . 
re ,  the 
rcen t  of 
nno t   be 


Tran 
Incr 
Busi 
Cong 


37a 

scr 
eas 

nes 


Inve 
Smal 
10  ( 
(6/2 
natu 
1-40 


383 

stm 

1 

6/2 

8/7 

re 


Statement  of  Philip  H.  Dutter  ,  McKinsey  &  Co.,  Inc., 
ipt  of  Hearings  on  Product  Liability  Insurance  Premium 
es  Before  the  Subcomm.ittee  on  Capital,  Investment  and 
s  Opportunities,  House  Committee  on  Small  Business,  95th 
1st  Sess.,  pp.  245-46  (6/6/77). 

ee  Responses  to  Questions  of  the  Subcommittee  on  Capital, 
ent  and  Business  Opportunities  of  the  House  Com.mittee  on 
Business  submitted  by  the  Hartford  Insurance  Group,  pp.  9- 
8/77),  and  by  Liberty  Mutual  Insurance  Company,  p.  8 
7).  For  a  more  detailed  discussion  of  the  subjective 
of  the  underwriting  process,  see  Insurance  Study  at  1-21  - 


39 


See  Statement  of  M.  Walters,  Vice  President,  Government  and 


Industry   Relations,   ISO,   in   Hearings   on   Product    Liability 
Insurance   Premium   Increases  Before  the  Subcommittee  on  Capital, 


VI-60 


Investment  and  Business  Opportunities,  House  Committee 
Business,  95th  Cong.,  1st  Sess.,  pp.  lM-15  (6/6/77). 


on   Sm  a 1 1 


insurance  and   industry   contractors   in 

extent  to  which  ISO  manual  and  (a)  rates 

premiums  paid  by   firms   in   the   target 

not   able   to   establish   a   meaningful 


The  Task  Force  staff  attempted  to  match  the  data  on  rates  and 
premiums  provided  by  the 
order   to   ascertain  the 
were  reflected  in  actual 
industries,    but    was 
corr el ation . 

MO 

Insurance      Study      at      2-30;    also    see    Remarks    of    Mr.    Charles 

Derr       (representing      MAPI),         Advisory         Committee         on         Product 

Liability,    Fourth    Meeting,    pp.    38-39    (6/27/77). 

il  1 

The   summary  of  these  surveys  appearing  in  Chapter  I  of  the 

Industry  Study  is  inconsistent  with  these  figures  and   should   be 

considered  erroneous.   See  ld_.    at  1-6. 

42, 


"This  total  includes  26  letters  received  by  the  Office  of 
the  Ombudsman  of  the  Department  of  Commerce  prior  to  the 
formation   of   the   Task   Force, 


and   36  letters  received  by  the 
business  and   forwarded   to   the 


Senate  Select  Committee  on  Small 
Task  Force  for  analysis. 

43 

Other    examples    include: 

-A  manufacturer  of  power  mowers  who  found  affordable  products 
coverage  to  be  unavailable  in  1976  after  its  product 
liability  premium  increased  by  600  percent  in  one  year  in 
1975.       Letter    to    Task    Force    (11/2/76). 

-A  manufacturer  of  small  gas  turbine  engines  which  are  used 
as  aircraft  components  has  been  unable  to  obtain  a  premium 
quotation  of  less  than  three  percent  of  sales.  Letter  to 
Task    Force    (9/17/76)  . 

-A  manufacturer  of  commercial  cooking  appliances  with  under 
$1  million  in  sales  had  its  1976  prem.ium  for  products 
coverage  increase  445  percent  in  one  year.  Letter  to  Task 
Force    ( 10/7/76)  . 

-A  sporting  goods  company  reported  that  its  1977  premium  for 
products  coverage  increased  by  358  percent  over  its  1976 
level--a  total  increase  in  premium  since  1975  of  2,100 
percent.       Letter    to    Under    Secretary    of    Commerce    (6/21/77). 

-A  manufacturer  of  respirators  for  hospitals  was  confronted 
with  a  1977  premium  increase  of  447  percent.  Memorandum  for 
San  Francisco  District  Office  Director  from  Michael  A. 
Donohue,  Trade  Specialist,  U.S.  Department  of  Commerce 
(7/77)  . 


VI-61 


Committee    on    Product    Liability, 


See      Transcript,       Advisory 
Third    Meeting    (1/11/77).     , 

See  Remarks  of  Frederick  Juer  ,  Advisory  Committee  on 
Product  Liability,  Second  Meeting,  p.  18  (11/1/76),  and  Third 
Meeting,  pp.  58-60  (1/11/77)  (impact  on  small  businesses  in 
sporting  goods  ind ustr y--some  firms  pay  up  to  eight  percent  of 
sales).  Remarks  of  James  Mack,  Advisory  Committee  on  Product 
Liability,  Fourth  Meeting,  pp.  M3-U5  (6/27/77)  (impact  of  so- 
called      "long-tail"    problem    upon   manufacturers    of   durable    goods). 

The  impact  of  product  liability  premium  increases  upon  small 
businesses  is  discussed  later  in  this  chapter.  See  p.  VI-20  et. 
seq .  For  a  discussion  of  the  impact  of  product  liability  upon 
manufacturers   of   durable    goods,    see    p.    VI-27. 


Liab 
d  isc 
prod 


incr 
repr 
1  ,22 
Comm 


U6 

il 
us 
uc 

47 

ea 
es 
1 
it 

48 


Liabil 
49 


Mar  s 

whil 

one 

of 

Advi 

(11/ 


h 

e 

pe 

sa 

so 

1/ 

50< 


See  Remarks   of   J.   McEwen,  Advisory  Committee  on  Product 

ity.  Third  Meeting,  pp.   41-42   (1/11/77).    See   also   the 

sion  of   the   impact  of  product  liability  upon  the  cost  of 

ts.  See  p.  Vl-27. 

The  average  premium  for  the  member  firms  of  NMTBA  have 
sed  86  percent  in  1977  over  the  1976  level.  This 
ents  a  total  increase  of  230  percent  since  1975  and  of 
percent  since  1970.  See  Remarks  of  J.  Mack,  Advisory 
tee   on  Product  Liability,  Fourth  Meeting,  p.  99  (6/27/77). 

See  Remarks  of  Joseph  McEwen,  Advisory  Committee  on  Product 
ity,    Fourth    Meeting,    pp.    23-24    (6/27/77). 

For  example,  Mr.  Robert  Clements,  Senior  Vice  President  of 
&  McLennan,  Inc.,  informed  the  Advisory  Committee  that, 
rates  for  products  coverage  for  most  firms  are  well  below 
rcent  of  sales,  those  rates  "may  even  approach  10  percent 
les"  for  some  small  companies.  See  Remarks  of  R.  Clements, 
ry  Committee  on  Product  Liability,  Second  Meeting,  p.  20 
76). 


Hear 
the 
Oppo 
21, 


the 

grea 

of  t 

affo 

sale 

Acco 

of  t 


See  Statement  of  Lester  L.  Rawls,  President  of  the  NAIC,  in 

ings  on  Product  Liability  Insurance  Premium  Increases,  Before 

Subcommittee    on    Capital,    Investment    and    Business 

rtunities  of  the  House  Committee  on  Small  Business,   pp.   20- 

29-30    (6/30/77). 

50  a 

The      results      of   the    trade    association    surveys    analyzed    by 

industry   contractor    also    show   the    af fordabil ity    problem    to    be 

ter    for    small    companies.       Industry    Study   at    IV-8    -    IV-9.       One 

hose    trade      association      surveys,      however,      found      that      the 

rdability      problem      was   most    severe    for    its   member    firms    with 

s   of   between    $5    and      $15      million.         NMTBA      Survey      at      C-87. 

rding      to      the    NMTBA    Survey,    the    average  machine    tool    builder 

his    size      paid      premiums      of      between      $12.3      and      $19.2      per 


VI-62 


thousand  dollars  in  sales,  compared  to  the  cost  of  $7.5  per 
thousand  dollars  paid  by  small  member  firms.  _Id  .  This  phenomenon 
was  especially  apparent  for  the  15  metal- form ing  firms  responding 
to  the  NMTBA  Survey.  The  average  cost  per  thousand  dollars  in 
sales    for    these    firms   by    firm    size    was: 


Total    Sales 
( in    mill  ions) 

Less    than    $2 . 5 
$2.5    to    $5 
$5    to    $15 
Over    $15 


Average    Cost 

per    Thousand 

Dollars    of   Sales 

$3.95 
$10.22 
$29.53 

$6.55 


Source:       NMTBA    Survey,    Supplement    B,    at    C-92. 

5  1 

See   Statement   of  John  K.  Dane,  Vice  President  and  General 

Counsel,  Liberty  Mutual  Insurance  Company,  in  Hearings  on  Product 

Liability   Insurance  Premium  Increases  Before  the  Subcommittee  on 

Capital,  Investment  and  Business  Opportunities,   House   Committee 

on  Small  Business,  95th  Cong.,  1st  Sess.  (6/28/77). 

5 1  a 

Id  .   The   Task  Force  found  that  large  firms  receive  more 

loss  prevention  advice  than  smaller  firms.   See  p.  VI-51. 


52 

See   Responses  to  Questions  of  the  Subcommittee  on  Capital, 

Investment  and  Business  Opportunities,  House  Committee   on   Small 

Business,   submitted   by   the   Hartford   Insurance   Group,   p.  14 

(6/28/77).   This  perception  could  add  to  both   the   afford ab il ity 

and  availability  problems  of  small  firms. 


53 
54 


Insurance  Study  at  1-24 


See   Remarks   of  Mr.  Madden  (representing  Eli  Lilly  &  Co 
Advisory  Committee  on  Product  Liability,  Second   Meeting,   p. 
(11/1/76). 


)  , 
17 


55 

Liabil 
cover  a 
by  his 
( premi 
price 

56 

Joseph 
Meetin 

57 
Produc 


See  Remarks  of  R.  Baldwin,  Advisory  Committee  on  Product 
ity.  Third  Meeting,  -.  43  (1/11/77)  (premiums  for  products 
ge  comprise  10.4  percent  of  the  price  of  machine  tools  sold 
firm);  Remarks  of  F.  Juer  ,  2d_ .  at  pp.  58-59  (1/11/77) 
ums  for  products  coverage  comprise  15  percent  of  sales 
of   some    sporting    goods). 

See      Volume      III,    Legal    Study   at    p.    74;    also    see    Remarks    of 
McEwen,    Advisory    Committee    on      Product      Liability,       Fourth 
g,    pp.    23-25    (6/27/77). 

See      Remarks      of      Charles      Stewart,       Advisory      Committee    on 
t    Liability,    Third    Meeting,    pp.    92-93    (1/11/77);       also      see 


VI-63 


Remarks    of   Joseph   McEwen,   Id . , 
(6/27/77);  MAPI  Survey  at  pp.  23-24. 

58 


Fourth   Meeting,   pp.   23-25 


Whal en  ,  Jr 


Hon.  Edward 


'Joint  Statement  of  Hon.  Charles  W.  „w.^_.^w, 
W.  Pattison,  Hon.  Donald  J.  Pease,  Hon.  Joel  Pritchard,  and  Hon. 
Newton  I.  Steers,  Jr.,  Hearings  on  Product  Liability  Insurance 
Premium  Increases  Before  the  Subcommittee  on  Capital,  Investment, 
and  Business  Opportunities,  House  Committee  on  Small  Business, 
95th  Cong.,  1st  Sess.  (April  4,  1977). 

58  a 

The   discussion   of   the  swine  flu  situation  which  follows 

attempts  to  describe  the  events  as  they  occurred.   The  Task  Force 

advances    no    opinion    as    to   whether   the   conduct   of   the 

pharmaceutical  and  insurance  companies  was  justifiable. 


59 
60, 


See    pp.    VII-29    -    32. 


'The  National  Swine  Flu  Immunization  Program,  as  enacted, 
provides  that  the  exclusive  remedy  for  personal  injury  or  death 
arising  out  of  the  swine  flu  program  is  against  the  Federal 
government  under  the  Federal  Tort  Claim  Act  (28  U.S.C.  S1346  (b) 
(1970)).  National  Swine  Flu  Immunization  Program  of  1976,  P.L. 
No.  94-380  (Aug.  12,  1976).  The  Federal  government,  in  turn,  has 
the  right  to  recover  all  or  any  portion  of  the  damages  it  pays 
which  are  attributable  to  the  negligence  of  any  program 
participant,      including    any    participating    pharmaceutical    company. 

Pharmaceuticals,  613  percent;  medical  devices,  389  percent. 
See    chapter    VI,    (See    Industry    Study,    Table    IV-13    at    IV-34). 

See  Letter  to  the  Task  Force,  (1/14/77).  The  writer 
predicted  that  either  his  company  would  fail  due  to  a  lack  of 
adequate  coverage  or  it  would  become  a  target  for  acquisition  by 
a  larger  company  better  able  to  assume  the  risks  involved  in 
developing    and    marketing    highly    innovative   medical    devices. 

63, 


See  Letter  to  the  Task  Force  (1/31/77). 


64. 


Richard    D 
Liabil ity , 


In      that      regard,      see      Comments      of      Mr 
Transcript,       Advisory      Com.mittee      on       Product 
Meeting,    pp.    78-79    (1/1 1/77)  . 

65 

This    impact    was    suggested    by   correspondence    received 

Task    Force    and    by    the    NFIB    Survey.         See      Letter       to      Task 

(1/14/77);    NFIB    Survey    at    10-11.       Survey    at    10-11. 


Wood  , 
Third 


by    the 
Force 


66 


Those       industries      were      SIC's    28-30,    Chemicals,    Petroleum, 


Rubber    and    Plastics;    and    SIC's    34-37,    Fabricated    Metal       Products, 
Tools    and    Machinery).       See    NFIB    Survey,    Table    15,    at    11. 

r  y 

For  a  discussion  of  the  effect  of  product  liability  upon 
business  survival,  see  NFIB  Survey  at  11;  Letter  to  Task  Force 
(1/14/77);    pp.    VI-32    -    35. 


VI -6  4 


For  example,  see  Statements  of  Mr.  Richard  Tittle, 
President  of  Micro  Metals,  Inc.,  representing  the  National  Small 
Business  Association,  and  R.  Baldwin,  representing  the 
woodworking  machinery  manufacturers  (also  a  member  of  the  Product 
Liability  Advisory  Committee  to  the  Under  Secretary  of  Commerce), 
in  Hearings  on  Product  Liability  Problems  Affecting  Small 
Business  Before  the  Senate  Select  Committee  on  Small  Business, 
94th  Cong.,  2d  Sess.,  pt.  1,  at  3,  511  (1976);  Statement  of 
Harold  B.  Halter,  Executive  Vice  President,  Farm  Equipment  Mfgrs. 
Assn.,  _I^.,  pt.  2,  at  141?  (1976)  (21  percent  of  members  perceive 
product~Tiabil ity  as  being  a  threat  to  their  continued  survival); 
Transcripts,  Advisory  Committee  on  Product  Liability,  First 
Meeting,  pp.  58-67  (9/20/76),  and  Second  Meeting,  p.  87 
(11/1/76). 

^^See  21-5  Letter  to  Secretary  of  Commerce  (8/31/76) 
(industrial  machinery  manufacturer  with  minimum  1976  premium  of 
$26,520  for  $1.3  million  in  sales--an  increase  of  over  1,800 
percent  above  1975  premium  which  reduced  profits  by  50  percent; 
Letter  to  Task  Force  (10/7/76)  (industrial  machinery  manufacturer 
with    premium    increase    from    1974    to    1976    of    1,700    percent). 

70 

See  Chapter  V,  p.  10  _et.  seq . ;  Chapter  VI,  p.  22;  Letter  to 

Task  Force  from  machine   tool   company   (1/31/77)   (1976   premium 

equals  12.3  percent  of  sales). 

7 1 

See   Letter   to   Task   Force  from  Messrs.  Joseph  McEwen  and 

William  M.  Brooks,  members   of   the   Product   Liability   Advisory 

Committee  to  the  Under  Secretary  of  Commerce  (6/27/77). 

'''^See  Wall  Street  Journal,  p.  1,  Col.  3  (6/3/76). 

73 

For  example,  see  testimony  of  Howard  J.  Bruns,  President  of 

Sporting  Goods  Manufacturers   Association,   Hearings   on   Product 

Liability   Insurance  Premium  Increases  Before  the  Subcommittee  on 

Capital,  Investment  and  Business  Opportunities,   House   Committee 

on   Small   Business,   95th   Cong.,  1st  Sess.  (4/18/77);  Letter  to 

Task  Force  from  R.  Baldwin  (6/21/77)  (names  of   seven   additional 

companies   which   have   allegedly   been  forced  out  of  business  by 

product  liability). 

74 

Our  data  on  this  issue  are  further  developed  in  Chapter  VII 

at  p.  151  . 

'^^E.g .  ,  Forbes,  at  57  (8/1/76)  (Frederick  Watkins  of  Aetna 
Insurance  Co.  estimated  one  million  such  lawsuits  were  filed  in 
1975);  Wall  Street  Journal ,  p.  4,  col.  12  (10/27/76)  (cites 
Conference  Board  estimate  of  one  million  suits);  Statement  of 
Richard  Tittle,  President  of  Micro  Metals,  Inc.,  in  Hearings  on 
Product  Liability  Problems  Affecting  Small  Business  Before  the 
Senate  Select  Committee  on  Small  Business,  94th  Cong.,  2nd  Sess., 
pt .  1,  p.  4  (September  8,  1976)  (estimate  of  1.5  million  lawsuits 
filed  in  1975). 


VI-65 


76 


See   Time   Magazine, 


1   (9/12/77) 


The  advertisement 


"No  one  likes  higher  prices,  but  we're  telling  it 


stated  in  part, 
straight." 

77 

Remarks   of  R.  Nader:   Proceedings,  First  World  Congress  on 

Product  Liability,   p.   184   (1977).    Similarly,   Robert   Begam, 

President   of   the   Association   of  Trial  Lawyers  of  America,  has 

stated  that  the  number  of  product   liability   lawsuits   filed   in 

1975   was,   at  most,  38,450.   See  Trial  Magazine ,  p.  48  (November 

1976)  . 


78 

lawsui 

urged 

The  Ta 

becaus 

produc 

from 

liabil 

79 

the  H 
Oppor t 
Sess  .  , 


Data  on  the  trends 
ts  commenced  annually  w 
the  Task  Force  to  und 
sk  Force  decided  that  s 
e  of  its  prohibitive  c 
e  data  of  little  or  no 
the  ISO  Closed  Claim 
ity  claims  do  not  resul 


in  the  number  of  product  liability 
as  felt  to  be  so  important  that  many 
ertake  a  survey  of  courthouse  files, 
uch  a  survey  would  be  impractical 
ost  and  because  it  would  necessarily 
significance  statistically.  Data 
Survey  suggest  that  most  product 
t  in  lawsuits  filed. 


VJalters,  Vice  President,  ISO,  Before 
Capital  ,   Investment   and   Business 


See   Statement   of   M. 
ouse   Subcommittee   on 
unities,  House  Committee  on  Small  Business,  95th  Cong.,  1st 
p.  20  (6/6/77). 


79  a 

Id  .    Preliminary   dat 

indicate  that  less  than  six 

claims   analyzed   were   litig 

1976  Product  Liability  Closed 

Preliminary  Survey  Results,  p 


a  from  the  ISO  Closed  Claim  Survey 
percent  of  the  product  liability 
ated  to  a  final  court  verdict.  ISO, 
Claim  Sruvey:  Detailed  Analysis  of 
.  94  (December  1 976)  . 


79b^ 

Closed  C 
with  re 
ISO. 

80lS 
Prel imin 

impact  o 
full  ec 
caref ull 
the  me 
prel imin 
1 iab  il it 

82 


SO  has  reported  to  the  Task 
laim  Survey  will  show  that  no 
spect   to  73  percent  of  all  the 


Force  staff  that  its  Final 
lawsuits  were  comm.enced 
closed  claims  analyzed  by 


0,    1976    Product    Liability 
ary  Analysis  of  Survey  Results, 

. ,  Table  2-1  at  33-  ISO  did 
f  legal  fees  upon  a  claimant's 
onomic  losses.  The  final  ISO  C 
y  analyzed  in  regard  to  changes 
thodology  relating  to  how  t 
ary  data  indicate  that  less  tha 
y  claims  are  litigated  to  a  fin 


e  p.  11-43  _e_t.  seq  .  (citin 
review  of  appellate  cases  (50%) 
35%),  Down  state  Illinois  Jury  S 


Se 
Stud  y ' s 
Survey  ( 
City  Trial  Lawyers'  Association  Survey 


Closed    Claim   Survey: 
p.  6  (December  1976). 

not  attempt  to  analyze  the 
ability   to   recover   his 

losed  Claim  Survey  must  be 
in   these   estimates   and 

hey   were   compiled.    ISO 

n   6   percent   of   product 

al  verd  ic  t . 

g  results  fron^  the  Leg?l 
,  the  Cook  County  Jury 
urvey  ( ^9%)  and  the  Kansas 
(3670.) 


VI-66 


83 
Closed 

84 
on  Pro 

85 


Based  on  a  comparison  of  the  results  of  the  preliminary  ISO 
Claim  Survey  and  the  Illinois  Jury  Verdict  Survey. 


See   Remarks  of  M 
d  uc t  Liabil ity ,  p 


Belli,  Proceedings,  First  World  Congress 
177  (1977). 


in  J  u 

OSHA 

the 

indu 

seve 


Ind  u 
info 


r  1 

Me 

St 

r  i 
86 

St 

rm 


BLS  does  not  compile  data  on  the  number  of  product-related 
es  occurring  annually  in  the  workplace.  As  is  noted  above, 
estimates  are  not  available  for  the  same  period  for  which 
w  York  Worker  Compensation  data  were  analyzed  by  our 
ry  contractor  (1966-1972).  Finally,  BLS  data  on  injury 
ty  were  not  available. 


The  data  from 
ry  Study  are 
at  ion .   Id .  at 


five  other 
for   1974 
III-4. 


states  which  are  presented  in  the 
only   and    provide    no    trend 


86a, 


The  Industry  Study  also  assumes  that  changes  in  the  number 
of  weeks  and  amount  of  compensation  awarded  are  accurate 
surrogates  for  determining  trends  in  injury  severity.  While  the 
Task  Force  has  no  information  regarding  this  assumption,  there 
may  be  economic  or  other  factors  which  distort  the  relationship 
between  injury  severity  and  these  two  surrogates. 

fi  A  K 

Similarly,  according  to  FAA  data  analyzed  by  the  Industry 
Study,  the  number  of  general  aviation  accidents  reported  has 
increased  by  82  percent  during  the  period  from  1965  to  1974. 
Industry  Study,  Table  III-8  at  III-30.  On  the  other  hand,  the 
number  of  injuries  associated  with  chemicals  decreased  by  51 
percent  from  1974  to  1975.  _Id_.,  Table  III-7  at  III-27. 
Furthermore,  several  of  the  target  consumer  products  are  among 
the  25  product  categories  (3  percent  of  the  total  number  that  are 
monitored)  which  were  associated  with  approximately  60  percent  of 
all  injuries  reported  through  NEISS  from  1973  through  1975.  Id  . 
at  III-23.  The  target  products  include  pharmaceuticals  and 
lawnmowers.  Id.,  Table  III-6  at  III-25. 


^^Letter 
of  Planning 
(9/27/77). 

88. 


to   Task  Force  staff  by  William  W. 
Division,   Office   of   Strategic 


Wal ton  ,  Director 
Planning,    CPSC 


these  percentage 
NEISS   reporting 


It   is   unclear   what   portion,  if  any,  of 
increases  resulted  from  the  improvements  in  the 
system  referred  to  above. 

89 

The      statutory      rationale      for      the    lower    benefit    levels    is 

that    the    employee    has   given      up      his      cause      of      action      in      tort 

against      his      employer,    and    the    possibility   of   recovering    greater 

damages,    in    exchange    for    the    payment   of   benefits      on      a      no-fault 

basis      through      what    is    intended    to    be    a    non-adversarial    process. 

For      criticism      of      the      effectiveness      of      the      current      benefit 

delivery        system         for        Worker         Compensation,         see        Workers' 

Compensation:       Is    There    a    Better    Way?      Report      to      the      President 


VI-67 


and  the  Congress  of  the  Policy  Group  of  the  Interdepartmental 
Workers'  Compensation  Task  Force,  pp.  27-29  (1/19/77)  ("Worker 
Compensation    Report"). 


90 
91 


45. 


See  p.  VII-86. 

Worker  Compensation  Report,  Note  1,  supra  at  pp.  20-23,  39- 


9 
Third 


See 

Meet 


93 


Build 
ind  ic 
man  uf 
workp 
repor 
Simil 
cl  aim 
("AMI 
cl  aim 


The 
er  s ' 
ate 
ac  tur 
1  ace 
ts  we 
arly, 
s  clo 
A   Su 
s  ana 


94 


Analy 
the 
Claim 
thoug 

9 

wheth 
injur 

regar 

and  V 

9 


See 
sis , 
Task 

Surv 
ht  to 


Tr  anscr ip 
ing,  PP-  3 

surveys 
Assoc  iatio 
that  lega 
ers  with  r 
ace  id  en ts 
re  filed  . 
the  Ame 
sed  during 
rvey")  fo 
lyzed  invo 

ISO  Surv 
Table  6-2, 

Force  sta 
ey  will  be 

be  over  $ 


Id . ,   Detailed 
er  Worker  Compe 
ed   employees 
ding   contribut 

11-89  et.  seq. , 
See  Volume  II, 


t,   Advisory   Committee  on  Product  Liability, 
5-36  (1/11/77). 

conducted   by   the   National   Machine   Tool 

n,  albeit  of  little  statistical  significance, 

1   actions   were  brought  against  machine  tool 

espect  to  approximately   45   percent   of   the 

involving      their    products    in    which    accident 

See       Industry      Study,       pp.       VI-12,       VI-13. 

rican      Mutual       Insurance    Alliance's    survey    of 

1975    with    total    payments    exceeding      $100,000 

und      that      70    percent    of   the    awards    in    the   79 

Ived    industrial    products.      J[d.    at    VI-10. 

ey.  Capsule  Analysis,  p.  9,  and  Detailed 
p.    59    (12/76).      However,    ISO   has    reported    to 

ff  that  the  average  award  in  the  Final  Closed 
$47,900.       In    the    preliminary    survey,    it      was 

100,000. 

Analysis,  pp.  40-43.  For  a  discussion  of 
nsation  should  be  the  exclusive  remedy  for 
and  of  the  proposals  to  modify  the  rules 
ion      and       indemnity,       see    p.    VII-IO3   £t^.    seq . 

respectively. 

Industry  Study  at  D-17. 


In  California  it  has  been  estimated  that  only  287o  of  Worker 
Compensation  claims  involve  industrial  equipment.  Only  a 
percentage  of  these  accidents  would  result  in  successful  product 
1 iabil ity  claims  . 

97 

See   Transcripts,   Advisory  Committee  on  Product  Liability, 

Second  Meeting,  pp.  39-43  (11/1/76);   Third   Meeting,   pp.   31-33 

(1/1 1/77)  . 

98 

See      Insurance      Study      at      4-67;    Volume    III,    Legal    Study   at 

100-101;    Transcript,    Advisory      Committee      on       Product      Liability, 

Third    Meeting,    pp.    33,    35-36    (1/11/77). 

99, 


See    pp.    VII-95 


96. 


VI-68 


QQa 

To   the   extent   insurance   carriers   write   both   product 

liability   and   V/orker   Compensation   insurance,   the   effect   of 

subrogation  will  be  reduced. 


100, 


A      Survey      of      VJorkers 


See         Industry        Study      at      VI-1 1 
Compensation       Insurers:  Preliminary      Report,       Teknekron  ,       Inc., 

Berkeley,    California    (9/15/76). 


101 


102 


See    Industry    Study,    Volume    II    at    D-17. 


Industry    Study    at    VI-10 


103- 


of  p 
them 
Task 
Prel 
Surv 


mill 
were 
of  t 
firm 
con  t 
larg 
58. 
some 


There  is  a  good  deal  of  specul 
roduct  liability  claims  that  are  in 
selves.  See  pp.  VII-95  -  96.  et . 
Force  staff  that  it  will  reduce  it 
iminary  Closed  Claim  Survey  to  18% 
ey. 

1  04 

Approximately   50  percent  of  the 

ion  in  sales  indicated  that  "produc 

"not   applicable"  to  product  safe 

he  larger  firms  surveyed.   Nearly  4 

s   surveyed   found   that   "product 

rol"  were  "not  applicable,"  while  o 

e   firms  agreed  with  that  assessmen 

As   noted   at  p.  VI-50,  semantica 

of  these  differences. 

104a 


ation  about  the  percentage 
stigated  by   the   carriers 

seq.  ISO  reported  to  the 
s  estimate  from  ^0%    in  the 

in  the  Final  Closed  Claim 


firms  with  less  than  $2.5 
t  design  and  engineering" 
ty,  compared  to  12  percent 
1   percent   of   the   small 

manufacturing  and  quality 
nly  8.7  percent  of  the 
t.  Industry  Report  at  IV- 
1  difficulties  may  explain 


See  Industry  Study,  Table  IV-32  at  IV-61. 


105 
106 
107 
108 

109j 

of  the  e 
Chapter 

1  10 


Id.,  Table  IV-33  at  IV-63. 
Id.,  Table  IV-32  at  IV-61. 

lA- 
Id. 


d.,  Table  IV-31  at  IV-59.  For  a  more  complete  discussion 
lements  of  product  liability  prevention  programs,  see 
IV   of    this    report. 

MAPI    Survey    at    p.     12. 

_d.    at    p.    13. 

A  recent  study  of  business  research  and  development 
investments  prepared  by  the  Battelle  Memorial  Institute  indicated 
that  the  tort  liability  system  has  caused  an  increased  investment 
in  "applied  research  to  prevent  liability"  from  products.  See 
Remarks      of      J.       Sheehan  ,      Legislative      Director      of      the      United 


1  1  1 


112 


VI-69 


Steelworkers    of    Ame 
Third    Meeting ,    pp . 

1  1  ^ 
^Thus  ,      in    th 

of  the   respondent 

"special   program  d 

while  60  percent  st 

dealing   with   "pro 

Industry  Study,  Tab 

difference   may   tu 

it  is  also   possibl 

product  prevention 

1  1  4 

For   a   desc 

this  report  at  IV-5 

Insurance  Study  at 

Vice   President   an 

Company,  in   Hearin 

Increases   Before 

Business  Opportunit 

Cong  .  ,     1st    Sess . ,    p 


rica,    Advisory    Committee    on    Product    Liability, 
74-75    (1/11/77). 

e  Industry  Study's  telephone  survey  37  percent 
firms  indicated  that  they  had  adopted  a 
irected  at  reducing  product  liability  claims," 
ated  that  they  had  product  safety  programs 
duct  manufacture  and  quality  control."  See 
le  IV-32  and  IV-61;  Chapter  IV  at  IV-6.  The 
rn  on  the  word  "special"  or  other  factors,  but 
e  that  there  is  confusion  regarding  what 
techniques    are. 

ription  of  these  services,  see  Chapter  IV  of 
,  IV-10  -  11;  Industry  Study  at  IV-12  -  IV-m; 
1-42.  See  also  Statement  of  John  K.  Dane, 
d  General  Counsel  of  Liberty  Mutual  Insurance 
gs  on  Product  Liability  Insurance  Premium 
the  Subcommittee  on  Capital,  Investment  and 
ies.  House  Committee  on  Small  Business,  95th 
p.     1-14    (6/28/77). 


1  16a 


1  17, 


Id.    at    IV-25. 


The  comparable  percentages  for  large-  and  medium-sized 
firms  were  74  percent  and  72  percent,  respectively.  See  Chapter 
IV    at    IV-5,     IV-10;    Industry    Study    at    IV-13,     IV-60. 

-I    1   Q 

Insurance    Study    at    1-42. 

1  1  9 

For      a      discussion      of   the    disadvantages   of   small    firms    in 

coping    with    the    product    liability    problem,    see    pp.    VI-24    -    27. 
120, 


See    Industry    Study    at    IV-102. 

^^hnsurance      Study      at    1-38,     1-44;    see    Chapter    VII    at    p.     143 
for    a   more    complete    discussion    of    this    issue. 


VI -7  0 


Chapter  VII 

Remedial  Approaches  in  the 
Field  of  Product  Liability 


Part  I 
Introduction 


CHAPTER  VII--REMEDIAL  APPROACHES  IN  THE  FIELD 
OF  PRODUCT  LIABILITY 


II.'TRODUCTION 

THE  SOURCE  AND  SCOPE  OF  REMEDY  ANALYSIS 

Many  proposed  modifications  in  the  current  system  of  product 
liability  law  (remedies)  have  been  brought  to  the  attention  of 
the  Federal  Interagency  Task  Force  on  Product  Liability.  Som.e 
have  been  homespun  attempts  at  "reform"  that  lack  any  in-depth 
development  or  analysis.  These  proposals  were  usually  contained 
in  letters  from  distressed  manufacturers  who  simply  wanted  "quick 
relief"  from  the  current  product  liability  system.  The  authors 
of  these  letters  feared  that  the  continuation  of  the  current 
system  might  cause  them  to  go  out  of  business. 

The   Task   Force  also  received  some  more  highly  developed  and 

specific  remedial  proposals.   Suggestions  of  this   type   came   in 

response   to   our   notice  in  the  Federal  Register  of  our  Scope  of 

1 
Research  being  conducted.   Other  recommendations  were  brought   to 

our   attention   by   members   of  the  Under  Secretary  of  Commerce's 

Advisory   Comimiittee.    Suggestions   about   remedies    were    also 

developed   at   a   symposium   held  under  Task  Force  auspices.   The 

Task  Force  and  its  staff   engaged   in   a   process   of   continuing 

development,    analysis,    and    review    of   remedial   proposals 

throughout  the  course  of  the  study.   See  Ch .  I,  pp.  7-18. 

Our  legal  contractor  reviewed  legal  literature,  case  law,  and 
statutory  models  (when  available)  that  related  to  all  remedies 
considered  in  this  chapter.  Our  industrial  contractor  gave 
special  attention  to  remedies  it  believed  had  the  potential  for 
near-term  alleviation  of  current  manufacturer  product  liability 
problems.  These  include  the  use  of  Worker  Compensation  as  an 
exclusive  remedy  for  workplace  accidents,  the  development  of 
safety  certification  programs  for  industrial  and  unregulated 
consumer  products,  mandatory  provision  of  product  liability 
prevention  programs  by  insurers  and  self-insurers,  changes  in 
federal  accounting  rules  and  standards  for  write-off  of 
contingent  liabilities.  Our  insurance  contractor  gave  special 
attention   to   remedies   that  would  affect  a  direct  change  in  the 


VII-1 


rr.ethods  whereby  product  liability  insurance  was  underwritten  and 
regulated.  It  also  evaluated  most  of  the  remedies  considered 
herein  and  attempted  to  estimate  their  im;pact  on  reducing  the 
cost  of  product  liability  insurance. 

The  reader  should  consult  the  Task  Force  legal,  industrial, 
and  insurance  studies  for  a  specialized  treatment  of  remiedial 
proposals.  Those  studies  also  contain  citations  and  supporting 
data  for  some  of  the  assertions  miade  in  this  chapter. 

This  chapter  will  not  attempt  to  discuss  all  remedial 
proposals  concerning  product  liability.  Rather  it  will  select 
those  which,  on  the  basis  of  information  brought  to  the  attention 
of  the  Task  Force,  deserve  full  analysis  and  treatment. 
Moreover,  the  chapter  will  give  more  thorough  treatment  to 
remedial  proposals  that  have  not  been  considered  in  the  past  by 
other  sources.  Our  goal  was  to  provide  an  analysis  of  remedies 
that  could  be  readily  used  by  legislatures  or  others  who  are 
giving  immediate  consideration  to  product  liability  reform.  It 
is  our  hope  that  our  discussion  of  remedies  will  be  useful  to 
those  sources  and  show  most  of  the  significant  implications  of 
the  remedial  proposals  discussed  herein. 

Finally,  it  should  be  noted  that  our  discussion  of  remedies 
in  this  chapter  does  not  evaluate  whether  product  liability 
insurers  have  engaged  in  unfair  or  unreasonable  practices  in 
pricing  their  products.  In  that  connection  there  have  been  some 
suggestions  by  a  variety  of  sources  that  neither  the  number  nor 
severity  of  product  liability  claims  justify  current  increases  in 
product  liability  insurance  rates.  Our  discussion  of  that 
problem  and  potential  remedial  action  can  be  found  in  Chapter  V 
of  this  report. 

BASIC  CONSIDERATIONS  IN  EVALUATING  REMEDIES 

In  the  course  of  our  study,  we  have  learned  that  many 
considerations  must  be  taken  into  account  in  the  process  of 
evaluating  potential  modifications  in  product  liability  law.  If 
one  approaches  evaluation  of  such  modifications  through  a  strict 
number  of  "criteria,"  the  rigidity  of  that  analysis  is  likely  to 
lead  to  oversight  or  omissions  of  important   matters.    For   that 


VII-2 


reason,   we   have   not   limited  ourselves  to  a  specific  number  of 
remedy  calipers. 

Nevertheless,  it  did  not  seem  appropriate  to  be  totally 
freewheeling  in  our  remedy  evaluation.  There  were  a  number  of 
important  considerations  that  can  be  utilized  in  evaluating  each 
of  our  remedies  where--indeed--we  have  information  that  would 
render  it  possible  to  do  so.  As  will  be  evident  from  the 
discussion  in  this  section,  these  considerations,  to  some  extent, 
"establish  conflicting  goals."  This  is  because  the  product 
liability  system  is  subject  to  the  conflicting  interests  of 
injured  parties,  manufacturers,  insurers,  and  others. 

We  have  attempted  to  evaluate  remedies  in  as  objecti\/e  a 
manner  as  possible  while  deriving  some  assistance  toward  that 
goal  from  the  six  considerations  set  forth  below. 

Consideration  I 

Ensure  that  a  person  injured  by  _an  unreasonably  unsafe 
product  receives  reasonable  compensation  for  his  or  her  injury . 

Neither  this  report  nor  others  can  detail  the  precise  scope 
of  the  product  liability  problem.  Nevertheless,  from  the 
perspective  of  some  businesses  it  would  appear  to  be  a  "crisis." 
In  an  atmosphere  of  crisis,  resort  is  sometimes  made  to  harsh 
measures  that  thwart  the  rights  of  ordinary  individuals.  We  deem 
it  inadvisable  to  rush  toward  such  remedial  approaches.  We  note 
that  many  thoughtful  persons  have  acclaimed  the  development  of 
the  current  product  liability  system  and  its  attempt  to  provide 
compensation  for  persons  injured  by  products.  See,  e.g.,  DOC 
Transcript,  The  Product  Liability  Advisory  Committee  to  the  Under 
Secretary  of  Commerce  (4th  meeting,  June  27,  1977),  remarks  by 
Ms.  Anita  Johnson  of  Public  Citizen's  Health  Research  Group,  pp. 
76-83  [hereinafter  cited  as  Advisory  Committee]. 

Over  30  years  ago,  Mr.  Justice  Traynor  stated  one  of  the 
basic  reasons  for  placing  the  cost  of  injuries  caused  by  unsafe 
products  on  the  manufacturer.   He  said: 

The   cost   of   an  injury  and  the  (subsequent)  loss  of  time  or 
health  may   be   an   overwhelming   misfortune   to   the   person 


VII-3 


injured,  and  a  needless  one,  for  the  risk  of  injury  can  be 
insured  by  the  manufacturer  and  distributed  among  the  public 
as  a  cost  of  doing  business. 

As  the  current  insurance  situation  in  regard  to  product 
liability  suggests.  Justice  Traynor's  thesis  may  have  its 
limitations:  at  som.e  point  some  manufacturers,  retailers  or 
distributors  of  products  m,ay  not  be  able  to  bear  the  full  common 
law  cost  of  injuries.  Nevertheless,  in  evaluating  each  of  the 
proposed  remedies,  one  must  not  overlook  the  practical  core  of 
Justice  Traynor's  thesis:  a  person  who  is  injured  by  an 
unreasonably  unsafe  product  should  receive  reasonable 
compensation  for  his  injuries  from  the  manufacturer  of  that 
produc  t . 


Obviously,   this   proposition   has  within  it  a 
questions.   First,  v-;hat  is   "reasonable"   compensa 
consideration   of  proposed  remedies,  we  will  addre 
this  topic.   Second,  what  is  an   "unreasonably   un 
Obviously   few,   if   any,   courts   would   impose 
manufacturer  of  knives  when  a  person  cuts  himself 
of  using  that  product.   On  the  other  hand,  m.ost  co 
a  manufacturer  should  be  responsible   for   a   fore 
caused   by   an  unsafe  condition  in  the  constructio 
In  our  discussion  of  remedies,  v;e  will  attempt  to 
insight   into   what   should   be   deemed   an  "unrea 
product  for  the  purposes  of  product  liability. 


t  least  two  key 
tion?  In  our 
ss  ourselves  to 
safe"  product? 
1 iabil ity  on  a 
in  the  course 
urts  agree  that 
seeable  injury 
n  o  f  a  product . 
provide  useful 
sonably  unsafe" 


In  sum,  the  basic  thrust  of  this  consideration  is  to  look 
with  a  critical  eye  on  remedies  that  can  only  be  justified  by  the 
fact  that  they  contain  "cost  saving  devices"  for  product 
liability  ins